Impact Of Leadership Style On The Organizational Performance

The small business sector is recognized as an integral component of economic development and a crucial element in the effort to lift countries out of poverty. Micro and Small Enterprises (MSEs) are engine of economic growth, job creation, poverty reduction and catalysts for socio-economic transformation in developing countries. They have not only been the means through which accelerated economic growth and rapid industrialization have been achieved but also a veritable tool for the achievement of national economic objectives at low investment cost as well as the development of entrepreneurial capability and indigenous technology. Ogujiubaet al. (2004) in their work, observe that apart from increasing per capita income and output, MSEs create employment opportunities, enhance regional economic balance through industrial dispersal and generally promote effective resource utilization considered important to engineering economic development and growth.

The success of the government and a country, in regard to business development, is related to small business sustainability. In many countries, especially in developing countries micro & small enterprises are small informally organized commercial operations owned and operated mostly by the poor. They account for a substantial share of the total employment and gross domestic product (GDP) contribute significantly to the alleviation of poverty and income creation. They are often the chief economic defense of the most vulnerable households in high-risk environment, such as civil conflict and natural disasters (micro enterprise laying the foundation for economic development. Micro, small and medium enterprises (MSMEs) could provide the solution to the employment-poverty dilemma. MSMEs in low and medium income economies make up the largest portion of private sector enterprises and provide the bulk of employment for the population. Although majority of the micro and small enterprises are informal (note that medium-sized enterprises are also known to operate partly informally), they are responsible for most job creation in both low- and middle-income countries. Micro and small enterprises however are notorious for having low productivity.

According to the World Bank, micro and small enterprises are those which employ no more than 50 people, and have total assets and an annual turnover of less than 3 million USD. However, definitions based on employment are the most common, even though there is variation on the upper and lower limits. In the Ethiopian context, the Ministry of Urban Development and Construction (MUDC) (2013) defines MSEs based upon the number of employees and the assets owned by the enterprises. An enterprise can be defined as micro and small when the number of employees (including the owner or family) is not greater than 30, and total assets do not exceed 1,500,000 ETB. This is the definition we followed in this paper. Since micro enterprises are typically informal, this study also covers the informal activities as a significant part of the MSE sector. This explains the reason why policy makers at various levels of government in Ethiopia have continued to focus attention at boosting the performance of small firms particularly those engaged in using local raw materials as input for industrial production. Many of these attentions have come in the form of institutional framework and financial support. Despite, MSEs have not performed well because of what Onugu (2005) identified as leadership style and marketing problems among others. Leadership is a social influence process in which the leader seeks the voluntary participation of subordinates in an effort to reach organization goals. A leader can be defined as a person who delegates or influencing others to act so as to carry out specified objectives. Today’s organizations need effective leaders who understand the complexities of the rapidly changing global environment. If the task is highly structured and the leader has good relationship with the employees, effectiveness will be high on the part of the employees. The study further revealed that Transformational leaders take great care to involve all members of the team in discussion and can work with a small but highly motivated team. Studies have revealed that the performance of organizations co-relate directly to the leadership styles of the leaders in the organizations. According to Nave (2006) the success or failure of the business depends on the leadership styles employed by the leaders. At present, research on leader behavior in small businesses is still very scarce. Considering the colossal amount of studies on the subject of leadership, this is a rather astonishing fact. Bass (2004) introduces three types of leadership styles such as transactional leadership, transformational leadership, and passive-avoidant leadership.

Transactional Leadership displays behaviors associated with constructive and corrective transactions. This style defines expectations and promotes performance to achieve these levels. According to Robbins (2003), transactional leaders are those who guide or motivate their followers in the direction of established goals by clarifying roles and tasks requirement. Transactional leaders are very focus of their task and are receptive to the performance of their followers. An effective leader influences followers in a desired manner to achieve desired goals. Different leadership styles may affect organizational effectiveness or performance. Transformational leadership is a stronger predictor of both job satisfaction and overall satisfaction. In the study it was concluded that organizational performance is influenced by a competitive and innovative culture. Organizational Culture is influenced by leadership style and consequently, leadership style affects organizational performance. In transformational leadership, the leader has the ability to identify the need for change, to set goals as well as to provide guidance towards the change while managing the transition effectively. Transformational leaders are proactive and endeavor to maximize the individual, group, and organizational development beyond expectation and provide a sense of mission. According to Avolio and Bass (2004), passive-avoidant leadership is comparable to “no leadership” while Gartner and Stough (2002) consider this leadership as a “do nothing” style leadership. This leadership generally avoids getting involved when important issues arise and also avoids making decisions.

The business performance of an organization is usually measured on three variables; markets, products and network. Market dimension is determined by increasing sales of existing products to existing markets (market penetration) and finding new markets for existing products (market development). Products dimension is determined by creation of new products for existing markets (product development), and creating new products while for new markets (diversification). The level of network development is measured by the number of distribution, marketing, design and partnerships established by a firm with customers, suppliers and other third-parties such as research centers.

Improved understanding of leadership style and its effect on the business performance of MSEs will help the enterprises and Ethiopia as a whole to meet the millennium development goals and vision of 2025. Hence, this proposal seeks to analyze the impact of leadership styles on the business performance of Micro and Small Enterprises (MSEs).