Strategic decision making

Course Academische Competenties Organisatie en Strategie 2014-2015

Teacher Dr A. D. Timmers

Date December 10th 2014

Hans Warmoeskerken ANR: 395833 j.j.w.warmoeskerken@tilburguniversity.edu

Celinde Sterkenbrug ANR: 697185 c.d.n.sterkenburg@tilburguniversity.edu

Jonie Meulenbroek ANR: 533899 j.l.m.meulenbroek@tilburguniversity.edu

Rene van Poppel ANR: 372336 R.vanpoppel@tilburguniversity.edu

Chantal Rensing ANR: 323972 C.Rensing@tilburguniversity.edu

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Management Summary In this literature study an effort was made to search for the relationship between different

management styles on the strategic decision making process. Literature has been examined

on the two different leadership styles: transformational and transactional, and on the four

main steps in the strategic decision making process. This literature was examined to identify

and evaluate what these two different leadership styles actually include and what behavioural

aspects are expected within these leadership styles.

A detailed literature research analysed several articles and theories, explaining the differences

between transformational and transactional leadership styles. The main researcher found

about leadership style is Bernard M. Bass. These theories described transformational leaders

as charismatic leaders who create common visions among their followers in a group. By

stimulating followers individually with incentives, the transformational leader style is that

followers think of problems in an innovative way and helps them to develop personal

capabilities. In the current environment, that is continuously changing, the transformational

leader incorporates stakeholder influences and uses consensus to make decisions.

Transactional leaders use a collectivistic decision making process, which does not directly

incorporate the opinions of stakeholders, but goals and decisions are based on personal and

individual interest. The opposite effect is the transformational leader who based the strategic

decision making process on group functioning.

The four steps of strategic decision-making lead to the efficiency of the decision. The goal

settings separate the transformational from the transactional leader on the stakeholders their

goals. Where transformational leader take the stakeholder more into account by making a

decision. The second step in the process is resource of allocations. Where budget, workforce

and workload and information management are the key factors. In this step of the process is

concluded that there is indeed an opposite effect of transformational and transactional

leadership style on the strategic decision making process. The options and alternatives are the

final step, the stakeholders influence, trade-offs and conflicts are taken into account. Hereby

the conflicts between leaders and teams point to an opposite effect of the leadership styles.

The last step of this process is the decision making. In this case the transformational and

transactional leadership styles are in all process steps opposites of each other.

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Table of Contents Management Summary ............................................................................................................................ii

Table of Contents .................................................................................................................................... iii

Chapter 1 Research Outlining ............................................................................................................... 1

1.1 Introduction .................................................................................................................................. 1

1.2 Main- and sub questions ............................................................................................................... 2

1.3 Methodology ................................................................................................................................. 2

1.4 Structure ....................................................................................................................................... 2

Chapter 2 Leadership styles ................................................................................................................. 4

2.1 Transformational leadership style ................................................................................................ 4

2.2 Transactional leadership style ...................................................................................................... 6

2.3 Identification ................................................................................................................................. 7

2.4 Conclusion ..................................................................................................................................... 8

Chapter 3 Strategic decision making process ....................................................................................... 9

3.1 Goal Setting ................................................................................................................................... 9

3.2 Resource allocation ..................................................................................................................... 10

3.3 Options and Alternatives ............................................................................................................ 11

3.4 Decision making .......................................................................................................................... 12

3.5 Conclusion ................................................................................................................................... 12

Chapter 4 Leadership styles and Strategic decision making .............................................................. 14

4.1 Goal Setting and Leadership styles ............................................................................................. 14

4.1.1 Environmental factors ......................................................................................................... 14

4.1.2 Objectives ............................................................................................................................ 14

4.1.3 Stakeholders ........................................................................................................................ 15

4.2 Resource Allocation and Leadership styles ................................................................................. 15

4.2.1 Budget .................................................................................................................................. 15

4.2.2 Workforce & Workload ........................................................................................................ 16

4.2.3 Information Management ................................................................................................... 16

4.3 Options & Alternatives and Leadership styles ............................................................................ 17

4.4 Decision Making and Leadership styles ...................................................................................... 18

Chapter 5 Conclusions ........................................................................................................................ 20

5.1 Conclusions ................................................................................................................................. 20

5.2 Managerial Implications .............................................................................................................. 21

5.3 Suggestions for Future Research ................................................................................................ 21

5.4 Limitations ................................................................................................................................... 22

Chapter 6 Bibliography ....................................................................................................................... 23

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Chapter 1 Research Outlining

1.1 Introduction The importance of a leader is extensively recognized, but the different types of leaders are

widely discussed. Management or leadership styles can be defined as the methods of

leadership that an administrator usually employs when running a business, with the role of

the manager to achieve the highest degree of effectiveness in their role (Business Dictionary,

2014). In the explanation of management styles there is a variety of different styles a manager

can carry out. For example: the autocratic, democratic, informal, supervisory, lasses-faire,

transactional and transformational leadership styles (Johnson, n.d.). In the last 25 years,

transactional and transformational leadership have been leading in leadership styles research

(Bass B. M., 1997), therefore these leadership styles will be the focus in this literature thesis.

Most researches are focussed on the different management styles compared with the results

of the company (Baum & Wally, 2003). However, there are more steps between the

management style and the results. One of the most relevant steps in this process is the

strategic decision making.

Strategic decision making is used by every company that exists; big or small, multinational or

entrepreneur. Economics say that the main task for a company is to provide consumers with

products or services and the board its task is to generate profit. Because of the on-going

change of the environment, it is necessary for boards to adapt their strategy over time (Ekvall

& Arvonen, 1991). This process of continuous strategic evaluation and adaption can be defined

as strategic decision making.

Multiple factors are considered important in strategic decision making and company

performance. For example; the demography of boards are considered crucial, and the right

combination of skills and personal characteristics are said to partially determine the company

its performance (Arvonen & Petterson, 2002), (Li, 2001).

Finkelstein and Hambrick (1996) argued that leadership styles influence strategic decisions by

affecting CEO his fields of vision, perceptions, and interpretations of information. This

happens to the extent that the leadership style of the CEO affects implementation of strategic

decisions (Finkelstein S. H., 1996). Therefore, strategic decision making is expected to be

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related to leadership style. Therefore, the problem statement of this study is: What influence

do different management styles have on the strategic decision making process?

1.2 Main- and sub questions What influence do different management styles have on strategic decision making?

What are the main steps within the theoretical field of strategic decision making?

What are the main theoretical perspectives on management styles?

What is the relationship between different management styles and the process of decision

making?

1.3 Methodology The purpose of this literature research is to analyse the relationship between the process of

strategic decision making to management styles. So first, the two variables strategic decision

making and management styles are researched and analysed separately. Thereafter, the

relation between the two is studied and defined.

As this study is a literature thesis, extensive literature research is needed by means of

researching available papers, books and journals. These will be critically reviewed in order to

obtain an objective view. For this reason, the main sources of information are tertiary sources,

both having an inductive and deductive approach. Through the literature found, a problem

statement and theoretical background were developed.

The theoretical background addresses the literature that is specifically linked to the

conceptual model, from the independent to the dependent variable. Therefore, the critical

literature review helps to get familiar with the existing information about the topic (Sekaran

& Bougie, 2014).

1.4 Structure In this literature study, it will be investigated if there is a link between different kinds of

management styles and strategic decision making. This will be executed by composing

multiple exploring chapters and a conclusion.

In the first chapter, the reader is introduced to the topic and the main- and sub-question(s)

are identified. Furthermore, in this chapter the methodology and the structure of the study

are laid out.

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In the thereafter following chapters, the variables management styles and strategic decision

making of the main questions will be extensively examined and explicated in their own,

respective chapter. In the last chapter, the combination of the two variables will be

investigated. The conclusion will be drafted based on the earlier chapters. In this conclusions,

the main- and sub-question(s) will be answered.

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Chapter 2 Leadership styles Nowadays, much of the leadership literature from the past 20 years is derived from Bass

(1997) and Burns (1978), who divide leadership into two groups; Transformational leadership

and Transactional leadership. There are many differences between these styles, where the

most important dissimilarity is the change aspect. Transformational managers style is

completely based on change (they are also called change agents) (Tichy & Devanna, 1986),

whereas transactional leaders are focussed on standard processes, project approaches and

crisis management. Both these styles will be further explored and explained in the following

paragraphs.

2.1 Transformational leadership style Transformational leaders are charismatic and have a strong personality and vision that they

use to lead their followers and create a common vision amongst them (Jacobsen & House,

2001). The most important vision that always returns is the need for continuous change and

the drive to stimulate development and innovation within the organisation. The

transformational leader is also capable of transforming individual followers and making them

aware of their own strengths and weaknesses (Bass, 1985, 1997).

In 1987, Bass et al. (1987), identified three main characteristics of a transformational leader;

charismatic leadership, individualised consideration, and intellectual stimulation.

Firstly, they claim that a charismatic leadership is a fundamental element of the

transformational process. Followers are said to place a great deal of trust and confidence in

the vision and values indicated by the transformational leader. Moreover, the followers tend

to develop emotional feelings about their leader. An explanation for this may be that

transformational leaders are said to pay more attention to the individual follower and thereby

understanding and sharing in the followers concerns and developmental needs (Bass,

Waldman, Avolio, & Bebb, 1987). Hence, a charismatic leader is essential in order to create a

shared vision among the followers.

Sometimes, inspiration is mentioned as a separate factor next to the charismatic leader,

whereas charisma is said to require identification with the leader, where inspiration does not

(Den Hartog, Van Muijen, & Koopman, 1997). In this report however, it is regarded as a part

of charisma as the similarities are pronounced and the inspiration dimension is not generally

recognised.

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Secondly, the earlier mentioned individualised consideration is a fundamental part of the

transformational leadership. The feeling of individual recognition from the leader causes the

followers to not only share the vision of the leader, but also develop this vision further. This is

a result of the attempt from the transformational leader to not only recognise and satisfy

current needs of their followers, but also to excite the follower his needs to develop (Bass,

Waldman, Avolio, & Bebb, 1987).

Also Den Hartog et al. (1997) and Bryman (1999) and in other researches, Bass (1985, 1990,

1997) and Yammarino & Bass (1990) recognised this characteristic of transformational

management. In their research, they support the claim that providing individualised

consideration helps the leader to develop and consider the follower by treating him/her as a

unique individual; meaning that every person needs a different treatment to gain his/her full

potential.

In addition to charisma and individualised consideration, multiple researchers (Yammarino &

Bass, 1990; Den Hartog, Van Muijen, & Koopman, 1997; Bass, Waldman, Avolio, & Bebb,

1987), recognise the value of the intellectual stimulation of followers their ideas and morals

in the transformational leadership style. Through intellectual stimulation, followers are

challenged to think about old problems in new and innovative ways. The leader aims to

support the follower to be critical and question the beliefs and values of themselves and

others. Hereby, they may recognise out-dated values and beliefs, which are no longer

appropriate for solving the current problems facing their organisation. Consequently of the

intellectual stimulation by the transformational leaders, followers will develop personal

capabilities to solve and recognise future problems (Bass, Waldman, Avolio, & Bebb, 1987). In

other words, due to the intellectual stimulation by the transformational leader, followers

learn to creatively and independently recognise and resolve problems, improving their

personal capabilities and thereby improving the quality of the leader his team.

These characteristics are widely used and often put in synonyms. For instance by Barling,

Slater, & Kelloway (2000), who divide them in four characteristics, namely; idealised influence,

inspirational motivation, intellectual stimulation, and individual consideration. Here,

Inspirational motivation comes forth from the idea to believe in the follower and let him

believe he can achieve goals that were earlier thought to be impossible. The entire vision is

promoted using idealized influence.

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It can be accepted that the transformational leadership style is recognised by a charismatic

and strong leader who has a clear vision and is able to develop a common goal within an

organisation. Moreover, Tichy & Devanna (1986) claim that he/she is courageous and has a

large belief in people. The transformational leader is value-driven, a life-long learner and is

able to deal with complexity, vagueness and insecurities.

2.2 Transactional leadership style Thought to be the opposite of transformational leadership is transactional leadership. One of

the main differences from transformational leadership is the attention to followers. The

transactional leader will merely pay attention to performances and not to the individual

follower. As a consequence, the individual will be less self-aware of his creativity and vision.

This type of leadership is less effective in changing environments and more effective in unique

project approaches and crisis management (Bass B. M., 1985).

Transactional managers usually notice their goodness of performance by receiving

compliments or certain rewards. When subordinates do not live up to the standards, the

manager will punish them in order to improve overall performances. This is the usual strategy

of a transactional leader. Leaders maintain a performance and reward (or punishment)

interaction. Note that punishments and rewards are only given when performances did not

meet the standards, making this a relatively reactive leadership style.

A few elements come forth from this leadership style; Contingent reward (personal rewards

and material rewards) is the behaviour from the leader that rewards or punishes the follower

for their work (Bass B. M., 1985) (Pearce & Sims Jr., 2002).

Contingency reward is the transaction between performance and reward. The harder an

employee works, the more rewarded he will be. Poor performance will not be rewarded and

often punished. The employee will be punished for bad performance where a

transformational leader would design a process or train the employees how to prevent such

performance in the future.

Employees feel more for a transformational leader according to Bass (1985). They feel more

inspired and seem relatively happier than employees who are working for a transactional

leader. However, Podsakoff et. al. (1982), have found a way to turn that around. From the

philosophy that all people have a desire, the transactional leader can anticipate on those

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desires. It follows from the theory that all people are corruptible. Hence, contingence reward

is proven very effective when the right people get the right reward for good performance.

Furthermore, both active management and passive management by expectations describe a

manager that focuses on supervision. In active management by expectations, the leader looks

at and corrects each subordinates performance. This style is adapted when managers take

corrective action when variances in standards are too big, or when standards are not met. The

leader acts like a monitor of the process, encouraging employees not to make any mistakes.

In comparison, in passive management by expectations, the leader waits for issues to arise

before interfering (Bass B. M., 2008). There is a distance between the employee and the

leader. This leadership style is related to laissez-faire leadership, meaning, there is only a

response when correction is needed after making a mistake or a bad decision.

These theories imply that a transactional leadership style is better fit in a structured

organisation, a project, or a surrounding where standardised systems play a bigger role. The

transactional leader will pay more attention to final results than to the process and

development.

When Bass (1985) designed the model for transformational and transactional leadership,

active and passive management by exception was considered one element for transactional

leadership. At the time, there was a third, namely Laissez-faire leadership. This style explained

that processes have a free flow; there are only few written rules and those are only interfered

when processes and performances fail. Hater and Bass (1988) changed their model after

finding a difference in management by exceptions, namely, passive and active management

by exceptions.

Hereafter, Den Hartog et al. (1997), found proof that laissez-faire and passive management by

exception were positively correlated. From then on, the two elements were put together,

resulting in the model used today.

2.3 Identification A generally accepted method for the identification of the leadership style is the MLQ

(Multifactor Leadership Questionnaire) developed by Bass and Avolio (1989). This is a forced

ranking questionnaire where respondents are asked to rate the behaviour of their leader on

the seven fundamental dimensions of either transformational or transactional leadership. It

concerns Charisma (12 items), Inspiration (4 items), Intellectual stimulation (4 items), and

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Individual consideration (4 items) for the transformational leadership style, and Contingent

rewards (4 items), Active management-by-exception (4 items), and Passive management-

by-exception (4 items) for the transactional leadership style. In this questionnaire, another

style was added; the Laissez-faire leadership style. (Den Hartog, Van Muijen, & Koopman,

1997) As this is not generally recognised as a third leadership style, this style is not further

considered in this report.

The MLQ questionnaire has been through minor changes since its identification, but the main

outlinings are still in place. Therefore, it can be established that this is an appropriate manner

to identify a leaders style.

2.4 Conclusion From the literature review conducted in this chapter, it became clear that the theory first

described by Bass et al. (1987) is still relevant. Slight modifications have been made from the

first draft concept, but the main concept remains the same. In the following table, an overview

of the dimensions of both the transactional and the transformational leadership style is

provided.

Transactional Transformational

Representative behaviours

- Providing personal rewards

- Providing material rewards

- Managing by exception (active)

- Managing by exception (passive)

- Charisma

- Individualised consideration

- Intellectual stimulation

Organisational structure

- Standardized systems - Innovation/Change

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Chapter 3 Strategic decision making process

It is critical for the effectiveness of a firm its strategic decision making to have well-established

internal decision making capabilities (Elbanna & Child, 2007). Evidence of several studies show

that a high quality of decision making leads to a better decision making process. Furthermore,

it is essential for top management teams to use accurate and reliable information during the

decision making process (Certo, Lester, Daily, & Dalton, 2006; McFayden & Cannella, 2004). In

this chapter, the four main steps in the process of strategic decision making are discussed.

These four steps include:

3.1 Goal Setting Goal setting is a crucial aspect and the first step in the decision making process. When setting

a goal for strategic decision making, decision makers should first look at the environment the

firm is in. Stable environments provide companies with the chance to collect reliable data

quickly and pressure free (Mintzberg, 1994). In an unstable environment, companies often

face time limitations to collect relevant data, or face the possibility of not obtaining any

relevant data. Consequently, information and data is limited and unreliable and goals will be

lacking credibility (Khatri & Alvin Ng, 2000). In most research settings, the most effective

decision making approach is the analytical approach. This is because mistakes are less made

in the analytical approach, and mistakes made in an unstable environment could be

devastating for a company.

The next step after information collection on the environment is to set objectives, which can

be done on several levels. An objective can be set based on business unit level and on company

level. The objectives managers state are often too limited, since it is only aimed at factors that

affect the business unit of their interest (Sharfman & Dean Jr., 1991). This can lead to

conflicting objectives in comparison with the objectives of a company as a whole. In general,

decision makers use a more rational process when decisions are linked to critical

consequences. However, when decision makers as a group do not agree to the same objective,

goal consensus, which is part of a rational process, cannot be reached (Higkson, Butler, Cray,

Goal SettingResource allocation

Options and Alternatives

Decision making

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Mallory, & Wilson, 1986). Therefore, it should be decided whether a company decides on a

certain goal on company level or business unit level, to enhance the effectiveness of the

decision process.

Another crucial aspect that should be taken into consideration while setting goals is the

influence stakeholders have on decisions. Stakeholders often influence the decision makers

to ensure that areas that are essential for them are also covered. An advantage of the

guidance that stakeholders give is that this guarantees rationality in the decision making

process (Frederickson & Iaquinto, 1989). Hence, stakeholders improve the process since other

aspects come to mind that are not considered by the company and its decision makers.

3.2 Resource allocation The next step in the decision making process is to look at the resource allocation. The

resources a company uses during the decision process can include; the budget, the workforce

and its work load over time, and information management.

How much an organisation spends on the entire decision making process is relevant, since it

can make the difference while considering options. In general, each company has a certain

budget available for research and development, either on business unit level or for the

company as a whole. However, these budgets are often rather limited, especially during times

of economic recession (ODonoghue, 2005). The budget can affect the quality of the decisions

made, the amount of information that can be gathered, and the resources that are available

for making strategic decisions.

In addition, the work force of the company and the amount of workload has an impact on

deciding and processing relevant information. It is expected that firms that are under

considerable external control are more likely to put much effort in the rationality of the

decision making, in order to satisfy those that have external control over the company,

influencing the decision making process. Employees have to provide a certain amount of

accurate data to show that the choices made are valid and that future decision need to be

based on that information (Feldman & March, 1981). Also the workload influences the time

available for the research and pressure put on company employees. This has an influence on

the accuracy and reliability of the decision process.

Furthermore, an influential aspect in resource allocation is information management, since all

further decisions are based on it. One major problem in information management is biased

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information, since this influences the quality of information and reliability of the decision. Bias

exists because decision makers often only search for positive information linked to their point

of interest, and forget to search for other relevant information for the company as a whole.

On the other hand, shared information enhances group performance and thus the decision

performance of the company (Kerr N. L., 2003 ; Laughlin, Gonzalez, & Sommer, 2003). These

factors influence the quality of the information gathering process that improves the reliability

of the research.

Overall, all factors mentioned above affect the effectiveness of the decision making process.

3.3 Options and Alternatives No matter in which environment the company is, not all decisions are equally relevant for the

company (Sharfman & Dean Jr., 1991). Decision makers often have common objectives, which

includes maximizing the accuracy and the decision quality while trying to minimize the effort

needed to get to a certain decision. This often leads to conflicting objectives, and therefore

trade-offs have to be made between accuracy/quality and minimizing effort. However, Keen

and Scott Morton (1978) lay emphasis on quality of the decision process. Therefore, it can be

assumed that most emphasis should be laid on the quality of the decision making process and

trade-offs should be made aiming at quality.

At this point in the process, stakeholders often try to persuade the decision makers to consider

options in the interest of the stakeholders. For example, shareholders always try to maximize

net profit on the long term, to be able to invest in the company, while managers try to make

short term profit which maximizes their bonuses (Frederickson & Iaquinto, 1989). This results

in conflicting stakeholder, manager and organizational goals.

Conflict on the other hand plays both a positive and negative role in the strategic decision

making process. It often increases productivity of employees and decision makers by

increasing the amount of new ideas that are proposed, which leads to an increased amount

of alternative options that have to be considered (Amason & Sapienza, 1997). Conflicts can

also negatively influence the decision making process because it can lead to a lack of fairness

and honesty within the process that can harm the foundation of cooperation within groups of

decision makers to come up with effective and operational decisions (Lovelace, Shapiro, &

Weingart, 2001). Depending on the company culture, conflict can either lead to an extensive

or limited amount of alternatives.

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3.4 Decision making Eventually the decisions can be made on two broad levels: group decision level and individual

decision level. On group decision level, many different parties contribute to the overall

decision making process. The decision makers are often influenced by social influences, which

both provide an advantage and a disadvantage in the decision outcome. As an advantage, the

opinions of many stakeholders can be included while making the decision. But as a

disadvantage, the decision process can become a rather long process of making trade-offs

between the demands of several groups which is often very inefficient (Kerr & Scott Tindale,

2004). On individual decision level, the decision is centralized and lays emphasis on the role

of contributors in the decision making process of a company and refers to the concentration

of the degree of authority or power in the decision process (Papadakis & Barwise, 2002). When

looking at the benefits, centralization can boost the speed of decision making because few

people are involved in the process, reducing the chance of conflict and the time to build up

consensus (Pfeffer, 1981). One of the disadvantages of centralization is that it may decrease

the rationality of decision making, since fewer people are involved which reduces the

information sharing and therefore decreases the advanced ideas for problem solving (r,

alskan, Atana, & Aksu, 2011). Further, stakeholder opinions are not incorporated in the end

decision when the process is centralized. Whether decisions are made on group or individual

level, depends on the resources that are available in the organization.

Additionally, decisions should be based on facts derived from relevant information, since by

this a company can achieve a better performance while basing its decisions on judgements.

The effectiveness of the process, including the decision and research objectives obtained in

the first step, depend on the decision making process itself (Elbanna & Child, 2007). The

overall effectiveness of the decision process is met, when all objectives set in the beginning of

the research are covered and the decision leads to a strategic step.

3.5 Conclusion The first step, goal setting, is concerned with the organizational environment, the objectives

set by importance, and the influence of different stakeholders on the aim of the goal. The

second step, resource allocation, discusses the different resources of a company to make

decisions including: budget, workforce and the workload, and information management.

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Furthermore, the third step describes options and alternatives, including the trade-offs made,

influence of stakeholders, and the conflicts that can arise. Decision making, the last step of

the process, discusses decisions made on group or individual level, and the effectiveness of

the decision making.

Goal Setting Resource Allocation Options &

Alternatives

Decision Making

- Environmental

factors

- Objectives

- Stakeholders

- Budget

- Workforce &

workload

- Information

management

- Trade-offs

- Stakeholder

influence

- Conflict

- Group

decision level

- Individual

decision level

- Effectiveness

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Chapter 4 Leadership styles and Strategic decision making The research question of this chapter is; what is the relationship between different

management styles and decision making? In the next chapter it is a step by step process of the

effect is on Strategic decision by the different management styles. With an overall view in a

table at the end of this chapter.

4.1 Goal Setting and Leadership styles

4.1.1 Environmental factors When looking at the environment the company is in, both transformational leaders and

transactional leaders perform well in a stable environment. However, in an unstable

environment companies have to deal with many uncertainties like time limitations and

irrelevant data, which might lead to goals that lack credibility. Transformational leaders have

the pressure of involving several stakeholders in the goal setting process. Though, due to time

limitations, the pressure on the process becomes too high when all stakeholders have to be

involved and consensus has to be reached (Bronkhorst, Steijn, & Vermeeren, 2013). For

transactional leaders this can be an advantage, since no other parties are involved. For both

leadership styles, time pressure in general leads to lack of credibility.

4.1.2 Objectives When setting the objectives, transformational leaders have a collectivistic vision in which they

try to include their followers in the goal setting process. By recognizing personal business unit

needs, transformational leaders stimulate followers to explore new perspectives and learn

new competences (Hetland, Skogstad, Hetland, & Mikkelsen, 2011). Furthermore is the

stressed collectivistic vision, the importance of sharing among team members instead of

emphasizing the individual effort.

On the other hand, transactional leaders mainly focus on a leader follower exchange

relationship by creating main goals and which have to be incorporated by the followers. In

other words, transactional leaders create goals without involving lower levelled employees by

reducing cooperation within teams (House, 1996). As a result, transactional leaders make clear

towards the followers what has to be done and what can be expected in return.

Hence, there is a considerable difference in the goal setting process between transformational

and transactional leaders (Hamstra, Van Yperen, Wisse, & Sassenberg, 2013). The main

difference comes down to the fact that transformational leaders have a collectivistic vision,

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by which employees are involved. While transactional leaders set goals without involving

employees.

4.1.3 Stakeholders As mentioned before, transformational leaders involve followers in setting objectives,

meaning that stakeholders are also involved in this process. This process involves a high level

of communication between the decision makers and the different stakeholders, which

enhances all stakeholders to communicate back and incorporate their opinion. On the

contrary, transactional leaders do not involve the different stakeholders in the goal setting

process (Whittington, Goodwin, & Murray, 2004). However, since the wishes of stakeholders

do have to be incorporated in the goal, transactional leaders do not have the choice to ignore

the wishes of the stakeholders.

4.2 Resource Allocation and Leadership styles

4.2.1 Budget Keller (1992) researched the influence of transformational leadership on project quality,

budget performance and schedule performance, all deriving from the research and

development point of view. Concluding transformational leadership has a positive effect on

all three subjects. Note that Keller (1992) used transformational as a moderator for predicting

its influence on budget performance. Since transactional leadership is considered the opposite

of transformational leadership, it is thought that transactional leadership has the opposite

effect.

Bass (1999) proved that transformational leadership is positively related with research and

development, rather than transactional leadership. Transformational is proven to be more

effective in a continuous changing environment (research and development) while

transactional is proven to be more effective during crisis or working for a strict goal.

Peters (1997) investigated if there was a direct relationship between the leadership styles and

financial factors. He investigated a relationship between sales per labor hour, labor as a

percent of sales, meeting budget expectations, and turnover ratio and transformational

and/or transactional leadership for a company with multiple stores. This study did not prove

any significance between the leadership styles and the financial variables.

Hence, there seems no direct relationship between transformational and transactional

leadership with budgeting, but possibly only as a moderating relationship. It is assumed that

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Transformational leadership has a positive moderating influence on budgeting, though this is

not concluded.

4.2.2 Workforce & Workload There is little known about the relationship between workload and transformational and

transactional leadership. Kan & Parry (2004) describe a relationship between the leaderships

and workload in New-Zealand hospitals; however, the research might not be generalizable.

The research stated that leaders have no time to carry out the vision and philosophy of a

transformational leader and subordinates have no time to develop themselves when the

workload is too high. Resulting in a fall-back in transactional or responsive behaviour.

However, Smith & Bourke (1992) conducted a study among Australian teachers, where the

results showed a positive relationship of job satisfaction to (subjective) workload. And as Bass

(1985) showed, transformational leadership influences job-satisfaction in a positive way,

mentioned that the linkage between workload and transformational leadership is not directly

investigated here. More research is needed to confirm or reject this conjecture.

Summarised, there are conjectures that transformational and transactional leadership are

positively or negatively related to workforce and workload, however, seeing the available

literature, there seems to be no evidence for such relationship.

4.2.3 Information Management Biased information influences the quality of information and so the reliability of decision

making. Shared information however, enhances group performance and therefore has

positive influence on decision making in an organisation. Mazdar (2001) carried out a study

where information between subordinates and transactional and transformational leadership

was investigated. Employees with a transformational leader will seek information more

frequently. This because the transformational leader carries out the ideology of self-thinking

and seeing the same vision. Employees with a transactional leader will not seek information

very frequently, as for the inversely arguments.

Additionally, organisation-based self-esteem is a factor for the frequency of information

seeking. Subordinates with a transformational leader and with a lower self-esteem will make

a lot more use of information seeking than subordinates with a higher self-esteem. There has

not been found a relation between transactional leadership, organisation-based self-esteem

and seeking information.

17

Hence, transformational leadership seems to have a positive relationship with information

management. It hasnt been found a positive, nor a negative relationship with transactional

leadership. Cerni et al. (2008) confirm there is a positive relationship with transformational

leadership and information processing.

4.3 Options & Alternatives and Leadership styles

4.3.1 Stakeholder influence The key point of the process of options and alternatives is that stakeholders, managers and

sometimes employees play a big role in decisions of this part of the process what can result in

a conflict between stakeholders, managers and organization goals.

For transformational leaders, as referred in the previous chapter, is identified by individualized

consideration. The decisions that leaders in the top management positions have the make do

requiring different kinds of needs (Finkelstein & Hambrick, 1997), they must find a balance

between the needs of the stakeholders, mission, vision and different kinds of values in the

organization, these kind of leaders do encourage new ways of thinking and are willing to

questions assumptions (Garza Mitchell, 2012). The transactional leadership style is

characterized by structured and standardized systems and based on individual decision

making. In case of a transactional leader, he will pay attention to the final result instead of

the process and development.

4.3.2 Trade off A common assumption about decisions between multi-attribute alternatives is that individuals

confront and resolve conflicts between values by making tradeoffs between attributes, which

is conducted by the transactional leader. People use a variety of strategies in making

preferential choices, some of them dealing with conflict and others avoiding it (Eisele, 2003).

Regarding the perspective of the transformational leader, the strategic decision is based on

different values of attributes, weighing the pros and cons of the strategic decision.

4.3.3 Conflicts To achieve strategic decisions in an organization, it might happen that conflicts appear. As

concluded in chapter 2, a conflict can appear between managers and stakeholders. Ayoko and

Konrad (2012), consider the conflict between the management and a team. Useful solutions

for conflicts are shared goals, vision, values and the relationship in a team.

The transformational leader has been linked to emotional behavior. The emotion of a team

18

can lead to damage the work attitude, which influences the driving decisions within an

organization (Ashkanasy & Hrtel, 2002). The transformational leaders are, according to his

emotional approach, able to manage conflicts better as a transactional leader. By adapting

emotions for example empathy properly, it has a positive side effect on the conflict and lead

to acceptance of the decision making process (Ayoko & Konrad, 2012). The transformational

leader is better accepted by its team, he stimulates individual consideration, inspiration and

motivation for a positive determination on conflicts.

4.4 Decision Making and Leadership styles

4.4.1 Individual and group decision level As from the last step in the strategic decision making process is the decision making. This last

part of the process can make the difference in a success or a failure. The transactional leader

who bases his process on rational thinking and finding results is more willing to make his

decisions individually Flood, et al. (2000) concluded from his research that transactional

leadership is negatively and significant related to consensus decision making. In this type of

leadership the leader competes with others to be in a better position compared to others

(Bass B. M., 1997). This leads to the fact that team members are not willing to cooperate with

each other, where each one is more focused on his individual decision making process then

the group goals.

In the opposite of the individual strategic decisions is the only leadership style that is positively

and significant related, the transformational leadership style where team effectiveness is

reported (Flood, et al., 2000). From the research of Flood, et al. (2000) it has reported that top

management groups on transformational leadership style are strongly related with group

effectiveness; it does have influence on the consensus decision making process. The top

management team is a small group of managers with high influence on the top of the

organization, this group is responsible for the overall business of the organization (Flood, et

al., 2000).

4.4.2 Effectiveness In the additional part of the strategic decision is the effectiveness part of the process. This

process is met, when all objectives from the first step untill the decision making are covered.

From the theoretical perspective the strategic decision effectiveness of the research from

Elbanna and Child (2007) is the most effective decision based on the rationality, intuition and

political behavior of the decision maker, the transformational leader has it in his nature to

19

react rational according to other ideas. The main issue of the effectiveness might be the team

effectiveness at the end of the decision. The implementation of the decision can be improved

if the decision is consensus by the entire team in the organization (Flood, et al., 2000). This

implies that the effective decision is made by the leader in transformational organization

styles. The effectiveness of transactional leadership style is hard to conclude since there are

no explicit researches about the transactional leadership style in organizations on strategic

decision making.

Transformational Transactional

Go

al

se

ttin

gs Environmental factors Positive relation Negative relation

Objectives Positive relation Positive relation

Stakeholders goals Positive relation Inconclusive

Re

so

ur

ce

al

lo

ca

ti

on

Budget Neutral relation Neutral relation

Workforce & workload Inconclusive Inconclusive

Information management Positive relation Neutral

Op

ti

on

s

&

alt

ern

ati

ve

s Stakeholder influence Positive relation Inconclusive

Trade-offs Positive relation Positive relation

Conflict Negative relation Positive relation

De

cisi

on

ma

kin

g Group decision level Positive relation Negative relation

Individual decision level Negative relation Positive relation

Effectiveness Positive relation Inconclusive

20

Chapter 5 Conclusions

5.1 Conclusions As can be seen in the previous chapter, the different management styles do have an impact

on the strategic decision making process. In the first step of the process, the goal setting

between the two leadership styles is based on different perspectives. The transformational

leader works best in a stable environment where there are less time limitations, due to the

fact that all stakeholders will be involved in the process to set goals. Whereas transactional

leaders can better deal with unstable environments, because goals are individually set.

Moreover, while the transformational leader wants to incorporate visions and opinions of all

stakeholders, the transactional leader sticks to its own opinion and bases its goals on personal

relevance.

In the next step, both types of leaders have to allocate resources, to be able to make critical

and relevant decisions. It could not be concluded that transformational leaders and

transactional leaders have a positive or negative relation with budgeting. Likewise, the work

load is not proven to be related with the leadership styles. There is an assumption that

workload has a negative influence on transformational leadership, but this seems not yet

investigated in contemporary literature. Furthermore, information management for both

leadership styles is important and bias is possible within both styles. However, the

transformational leader, in comparison to the transactional leader, stimulates information

sharing between all employees and thus reliability is a rather important aspect.

The following step includes choosing between several options and alternatives. Even though

both the transformational leader and the transactional leader have to make trade-offs

between several options, the transformational leader has a more difficult job since the

stakeholder opinions also need to be included during this trade-off. Within these trade-offs, a

transformational leader faces more conflicts between several objectives and goals, which are

individually important for different stakeholder groups. The transactional leader, on the other

hand, faces less conflicts while deciding between alternatives, because alternatives are

created from only one perspective. This however results in less options and alternatives for

the transactional leader, which may result in less relevant options.

In the last step, decisions have to be made. This can be done on group level and individual

level. Group decisions relates to the transformational leadership style as different

stakeholders are included in the process, whereas the individual level relates to the

21

transactional leadership styles. While the transformational leader has a more rational decision

making process since it incorporates many decisions from several stakeholders, the

transactional leader is less rational while making decisions. The final part of the strategic

decision making process is the effectiveness. This process can be divided in two parts, the

effectiveness decision, based on rationality and intuition, this implies the transactional leader.

The second part is the team effectiveness on a strategic decision what has to be consensus by

the entire team the transformational leadership style of the manager implies this.

In the additional part of the strategic decision is the effectiveness part of the process. This

process is met, when all objectives from the first step till the decision making are covered.

From the theoretical perspective the strategic decision effectiveness of the research from

Elbanna and Child (2007) is the most effectiveness decision based on the rationality, intuition

and political behaviour of the decision maker, the transactional has in its nature to react

rational. The main issue of the effectiveness might be the team effectiveness at the end of the

decision. The implementation of the decision can be improved if the decision is consensus by

the entire team in the organization (Flood, et al., 2000). This implies that the effective decision

is taken by the leader in transformational organization styles.

5.2 Managerial Implications For leaders, this literature research is relevant as it clarifies the different implications that

come with handling a certain leadership styles with regard to the strategic decision making

process. After reading this research, leaders should reflect on their leadership style and on

how it influences their strategic decision making process. From this, they can determine if the

current affairs are desired, or if changes in leadership styles are preferred. In other words,

he/she should investigate how his/her organisation its decision making process may be

(positively) changed when his/her leadership style is altered.

Consequently, it could be beneficial for top-managers to determine their preferred leadership

style in the other layers of the organisation. This could be used in selecting new

employees/leaders by desired characteristics.

5.3 Suggestions for Future Research

In order to practically test the theories gathered in this research, a case study could be

suggested. This could be done in order to find companies who apply transactional and

22

companies who apply transformational leadership styles. In these different companies, it

could be observed and investigated how their decision making processes differ from one

another.

Next to this, it has been acknowledged that there has been very limited research on the

subject of leadership styles and their influence on (strategic) decision making. (Lipshitz &

Mann, 2005) Generally, the mainstream literature on leadership chooses to ignore (strategic)

decision making. Read from the article of Lipshits and Mann (2005) ; Bass and Stogdills, 37

chapter long Handbook of Leadership does not contain a chapter that is allocated to decision

making. Moreover, Conger, Spreitzer, and Lawlers Leaders Change Handbook (1998) does

not list decision making in its table of contents. Therefore, for future research it is suggested

and advised that there should be more extensive studies on the relation between different

management styles and strategic decision making (processes).

5.4 Limitations In this research, two main limitations sufficed. Firstly, the time span of the research is a

limitation as this literature research was set to be performed in ten weeks. Due to this

limitation, subjects may not have been investigated as in depth as the researchers would have

envisioned, had they had more time. However, although there was limited time available, the

researchers feel they have composed a clear image of the workings of and relation of the

transformational and transactional leadership style and the different phases of strategic

decision making.

The second limitation was already described in paragraph 5.3 Suggestions for Future Research.

As there is limited research available on exact topic of this research, the connection between

leadership styles and strategic decision making, was made with researches which are a little

less obvious at first sight. This clearly limits the reliability of the study, but on the other hand,

the researchers feel as if they created a clear image of the link. An image which was previously

still somewhat missing in research.

23

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