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The Effects of Transformational Leadership on Organizational Performance

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Article  in  British Journal of Management · November 2008

DOI: 10.1111/j.1467-8551.2007.00547.x

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British Journal of Management, Vol. 19, 299–319 (2008)
DOI: 10.1111/j.1467-8551.2007.00547.x

The Effects of Transformational

Leadership on Organizational Performance
through Knowledge and Innovation*
Vı́ctor J. Garcı́a-Morales, Francisco Javier Lloréns-Montes and
Antonio J. Verdú-Jover
Faculty of Economics and Business, University of Granada, Campus Cartuja, s/n, Granada 18071, Spain,
and Faculty of Social and Juridical Sciences, University Miguel Hernández, Edificio La Galia,
Avda del Ferrocarril, s/n, Elche (Alicante) 03202, Spain
Emails: fllorens@ugr.es; victorj@ugr.es; ajverdu@umh.es

Today’s information and knowledge society requires new leaders who can confront a
reality based on knowledge and foster innovation to achieve improvements in
organizational performance. However, organizations sometimes fail to achieve
sustainable competitive advantage due to their limited understanding of the relation-
ships between these strategic variables. To date, very little research has analysed the
direct and indirect relationships between these variables. Our study seeks to fill this
research gap by analysing theoretically and empirically how the leader’s perceptions of
different intermediate strategic variables related to knowledge (knowledge slack,
absorptive capacity, tacitness, organizational learning) and innovation influence the
relation between transformational leadership and organizational performance. Based on
the literature, we develop a theoretical model that shows the interrelations between
these variables. We then test the model using data from 408 Spanish organizations,
discuss the findings and provide several implications for business practitioners.

Introduction the effects of transformational leadership on

Transformational leadership influences the fun-
damental attitudes and assumptions of an orga-
nization’s members, creating a common
mentality to attain the firm’s goals. This leader-
ship style usually generates higher performance
than transactional leadership (Bass and Avolio,
2000). Although evidence shows that the trans-
formational leader exercises a substantial influ-
ence on performance, understanding of the
processes through which he or she exerts this
influence is still limited and largely speculative
(Yulk, 1999). Few studies trace the causal path of
*The authors thank the Spanish Ministry of Science and
Research for providing partial funding for this research
through project SEC 2003-07755.
performance systematically by examining the
intermediate influence of leaders’ perceptions of
different strategic variables related to knowledge
and innovation (Bass, 1999). In today’s informa-
tion society, the management of knowledge and
innovation are key processes that enable us to
create, exploit, renew and apply knowledge flows
in new ways to create the essential competences
for improvement of organizational performance
(Barrett and Sexton, 2006; Grant, 1996; Hurley
and Hult, 1998; Nonaka and Takeuchi, 1995).
From this perspective, the transformational
leader should manage an organization under-
stood as a ‘system based on knowledge, a system
through which circulate information and basic
knowledge (explicit and tacit), knowledge ac-
quired from the outside (absorptive capacity), or

r 2007 British Academy of Management. Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford
OX4 2DQ, UK and 350 Main Street, Malden, MA, 02148, USA.
300 V.J. Garcı´a-Morales, F. J. Llore´ns-Montes and A. J. Verdú-Jover
existing knowledge in the organization (knowl-
edge used and knowledge slack). This circulation
of knowledge creates a knowledge flow that,
through various processes of transformation
(organizational learning), creates new knowledge
which, when applied (innovation), generates
essential competences for the firm’ (Nonaka and
Takeuchi, 1995; Senge et al., 1994). It is not the
members’ knowledge in itself that is strategically
vital, but the presence of good leadership to
enable the organization to integrate, share and
use this knowledge innovatively.
If we analyse this understanding of the
organization in depth, we see that basic explicit
and tacit knowledge circulates in the organization.
The degree of tacitness is especially strategic
(Lakomski, 2004; Winter, 1987), as tacit knowl-
edge is difficult to express, formalize or share,
making it much harder for competitors to copy
than explicit knowledge. Tacit knowledge is
crucial to managers’ mental models, which
determine how managers understand cause–effect
connections, give meaning to events and make
decisions (Lubit, 2001). Yet tacitness as a
theoretical concept has received little empirical
attention (Harrison and Leitch, 2000).
Organizational knowledge is acquired from the
outside through absorptive capacity. It is the
firm’s ability to observe the value of new knowl-
edge, assimilate it, and apply it to commercial
ends (Cohen and Levinthal, 1990). This dynamic
capability influences the firm’s ability to create
and deploy the knowledge required to build other
organizational capabilities (organizational learn-
ing, innovation) that give the firm a base from
which to achieve superior performance (Barney,
1991). Organizational knowledge also exists in-
side the firm, whether currently in use or awaiting
a production need. Knowledge slack is essential
for creating, sharing and exploiting new knowl-
edge (Cohen and Levinthal, 1990). Drawing on
Nohria and Gulati (1996), we define knowledge
slack as the pool of knowledge resources in a firm
in excess of the minimum necessary to produce a
given level of organizational output. Slack facil-
itates freedom to develop research or projects
that may not generate tangible outputs in the
short term but that may provide the knowledge
base for future success.
From the second part of the definition above,
we see that organizational learning enables
development of new skills and knowledge,
increasing the organization’s capacity to carry
out effective actions and improvements in orga-
nizational performance (Senge, 1990). Innovation
has been defined as a new idea, method or device,
the act of creating a new product, service or
process (PDMA, 2004). Although firm innova-
tion is widely prescribed as a means to improving
organizational performance (Hurley and Hult,
1998; Lööf and Heshmati, 2002), many firms do
not or cannot develop it properly. Researchers
have urged attention to what enables firms to
innovate (Zollo and Winter, 2002). Several
studies link ‘transformational leadership’ to
innovation (Damanpour and Schneider, 2006;
Howell and Avolio, 1993).
Leaders’ perceptions of these strategic vari-
ables are crucial to stimulating organizational
performance. They play a major role in informing
and moulding these variables by determining the
types of behaviour expected and supported.
Leaders tend to form simplified internal cognitive
representations and use these mental models to
focus on variables they judge to be critical. They
make decisions and measure their performance
based on these variables (Porac and Thomas,
1990; Westpal and Fredrickson, 2001).
Transformational leadership and
organizational performance: the
influence of knowledge and innovation
Leadership style has been highlighted as a
strategic factor influencing innovation and
knowledge (Nonaka and Takeuchi, 1995; Senge
et al., 1994). Transformational leadership, unlike
‘transactional’ leadership, stimulates innovation
and knowledge and generates advantages for
organizational performance (Howell and Avolio,
1993). Leaders should commit themselves to this
style of leadership, undertaking self-evaluation of
their way of acting (Bass, 1999). Managers’
perceptions of the organizational style of leader-
ship strongly influence the capability of promot-
ing this kind of leadership (Fowler and
O’Gorman, 2005).
Transformational leaders have charisma, in-
spiration, intellectual stimulation and individua-
lized consideration of employees (Bass, 1999;
Bass and Avolio, 2000). Such leaders encourage
good communication networks and a spirit of
trust, enabling transmission and sharing of
r 2007 British Academy of Management.
Transformational Leadership and Organizational Performance
knowledge and generation of knowledge slack
(Senge, 1990; Slater and Naver, 1995). Given the
uncertainty about the areas in which knowledge
may be useful, knowledge slack increases the
possibility that new information resembles exist-
ing information and thus the possibility of
internalizing information successfully (Cohen
and Levinthal, 1990). Firms assimilate new
knowledge more easily if their prior knowledge
or knowledge slack is closely related to the new
knowledge (Nonaka and Takeuchi, 1995). Ab-
sorptive capacity depends mainly on prior knowl-
edge, i.e. the knowledge available in the
organization (Cohen and Levinthal, 1990; Szu-
lanski, 1996; Van den Bosch, Volberda and de
Boer, 1999). Knowledge slack and the leader’s
perception of it facilitate the future exploitation
of knowledge to improve basic skills and
absorptive capacity in the organization.
Transformational leadership also influences
absorptive capacity. Leadership enables improve-
ment of individual absorption, design of an
organizational structure to fit the organization’s
characteristics, increased investment in research
and development and intense effort to strengthen
organizational absorptive capacity (Cohen and
Levinthal, 1990; Van den Bosch, Volberda and de
Boer, 1999). Absorptive capacity for the firm
involves clear division of roles and responsibil-
ities, as well as the skills and competences
necessary for efficient absorption (i.e. acquisition,
implementation, transformation and use) of tacit
and explicit knowledge. It allows the firm to adapt
to environmental changes and improve organiza-
tional performance. Absorptive capacity stimu-
lates areas of knowledge that are intertwined,
such as organizational learning and innovation. A
leader who is conscious of all organizational
routines and strategic processes through which
the firm absorbs knowledge to create value
strengthens efforts to foster potential and achieve
absorptive capacity (Zahra and George, 2002).
Transformational leaders also stimulate trans-
fers of explicit and tacit knowledge in individuals
and in the organization (Argyris and Schön,
1996). Tacit knowledge is more strategic than
explicit; it generates sustainable competitive
advantages and improvements in organizational
performance. More exhaustive examination is
thus desirable. Further, tacit knowledge influ-
ences other strategic variables, such as organiza-
tional learning (Senge, 1990).
r 2007 British Academy of Management.
301
Transformational leadership confronts reality
by drawing on intellectual capital, know-how and
learning. It influences learning positively, challen-
ging the existing level to influence organizational
innovation and improve performance (Argyris
and Schön, 1996; Glynn, 1996; Hurley and Hult,
1998; Senge et al., 1994). Transformational
leaders are the key to integrating processes to
construct a learning organization. They are
strategic in creating a climate that stimulates
the disciplines of organizational learning and
their interaction (Densten, 2005; Senge, 1990;
Slater and Naver, 1995). The leader’s perception
of organizational learning influences his or her
effort to foster it and to overcome the internal
scepticism and external difficulties that prevent it
(Wick and León, 1995).
Finally, transformational leadership usually
affects innovative behaviour positively – hence
the importance of the leader’s accurate percep-
tion of organizational innovation. Through
intellectual stimulation and individualized con-
sideration, transformational leaders generate
different ways of thinking, seeking new opportu-
nities or solutions to problems and adopting
generative, exploratory thought processes. They
also contribute to intrinsic motivation, inspiring
and stimulating higher-order needs that engender
creativity. They serve as role models and guides,
articulating a shared vision of innovation (Senge
et al., 1994).
A global model
This section presents a global model composed of
hypotheses about how transformational leader-
ship affects organizational performance by orga-
nizational knowledge and innovation. Our goal is
to analyse simultaneously the effect of relevant
factors on the relation between transformational
leadership and organizational performance, in-
cluding size as a control variable.
Influence of transformational leadership
Transformational leadership guides and moti-
vates a common vision of the organization. It
motivates workers to create and share knowl-
edge, generating knowledge slack (Argyris and
Schön, 1996; Senge et al., 1994). Knowledge slack
is essential to facilitating personal and professional
302 V.J. Garcı´a-Morales, F. J. Llore´ns-Montes and A. J. Verdú-Jover
growth (Senge, 1990), organizational learning
and innovation (Cohen and Levinthal, 1990).
Absence of slack is one of the main obstacles to
firms’ transfer of practical improvements (Szu-
lanski, 1996). Transformational leaders invest
substantially and continuously in developing
organizational knowledge slack to achieve high
innovation and effectiveness (Bass, 1999; Bryant,
2003). Thus:
H1: Transformational leadership will be posi-
tively associated with knowledge slack.
Leaders are crucial to the process of creating
cultures, systems and structures that foster the
absorption, assimilation and application of
knowledge (Kavanagh and Ashkanasy, 2006).
Transformational leadership can make organiza-
tions more effective by stimulating absorptive
capacity (Bass, 1999). As the importance of
knowledge assets and absorptive capacity grow,
firms will increasingly expect transformational
management of these valuable assets from their
leaders (Bryant, 2003).
Transformational leaders foster absorptive
capacity among the organization’s members by
encouraging employee empowerment and auton-
omy. They provide information, responsibilities,
skills and competences to the organization’s
agents, who may then use it to acquire, imple-
ment, transform and use a new practice and
improve internal communication by reducing
barriers to sharing knowledge, thereby increasing
the efficiency of the absorption process (e.g.
Cohen and Levinthal, 1990; Van den Bosch,
Volberda and de Boer, 1999). Thus:
H2: Transformational leadership will be posi-
tively associated with absorptive capacity.
As knowledge acquires importance in organi-
zations, employees must manage it as a source of
value creation and competitiveness (Whitehill,
1997; Winter, 1987). Firms today employ more
intellectual workers and have more tasks with
greater intellectual content, increasing the num-
ber of knowledge workers. Thus, more tasks or
jobs are not fully specified. Procedures for acting
on an intellectual issue cannot be easily written or
presented in manuals (Lubit, 2001).
Transformational leaders enable the search for
new opportunities, creation of a common vision,
and motivation and guidance of employees. The
search for new opportunities encourages greater
responsibility in employees and greater exploita-
tion of tacit knowledge at work (Bass, 1999). The
transformational leader can also generate a
shared vision through which all of the organiza-
tion’s members learn, using both explicit and
tacit knowledge (Bryant, 2003). The leader knows
that the organization’s members possess signifi-
cant intellectual capacity and tacit knowledge,
which should be used at work (Senge et al., 1994).
Transformational leaders guide others’ profes-
sional trajectories, giving them greater liberty in
their tasks by allowing them to make greater
intellectual decisions based on tacit knowledge
(Nonaka and Takeuchi, 1995). Thus:
H3: Transformational leadership will be posi-
tively associated with tacitness.
Because transformational leadership promotes
organizational learning (Senge, 1990; Slater and
Narver, 1995; Tushman and Nadler, 1986), it is
essential to the organization’s success in the
intellectual-capital-based new economy. A trans-
formational style allows the organization to learn
through experimentation, communication, dia-
logue (McGill and Slocum, 1993), personal
mastery (Senge, 1990) and organizational knowl-
edge creation (Nonaka and Takeuchi, 1995). A
learning organization can acquire and use new
and relevant knowledge better, develop critical
capacities and skills, and increase organizational
improvement (Argyris and Schön, 1996; Senge et
al., 1994). A transformational style encourages
the stimulation, individualized consideration and
motivation essential to learning (Sarros et al.,
2002), making a leader the catalyst, mentor,
facilitator and trainer for organizational learning
(Ulrich, Von Glinow and Jick, 1993). Thus:
H4: Transformational leadership will be posi-
tively associated with organizational learning.
The leader plays a critical role in generating
innovation (Tushman and Nadler, 1986) and
creating a climate that encourages the abilities
and practices to promote it (Van de Ven, 1986).
The leader’s characteristics and leadership style
are key determinants of innovative conduct in
organizations. Currently, there is broad consensus
that a collaborative, participatory leadership style
(transformational) is more likely to encourage
organizational innovation than a transactional
style (Kanter, 1983). Transformational style fos-
ters a common view of the organization’s goals,
r 2007 British Academy of Management.
Transformational Leadership and Organizational Performance
allows leaders to guide and motivate firm mem-
bers and seeks new opportunities and challenges
(Bass, 1999; Bass and Avolio, 2000). It creates
ideal conditions for innovation by creating teams
of innovative people and transmitting stronger
motivation to innovate (Senge, 1990; Senge et al.,
1994; Tushman and Nadler, 1986). Thus:
H5: Transformational leadership will be posi-
tively associated with innovation.
Knowledge slack, absorptive capacity,
organizational learning and innovation
Organizations must adapt more quickly to more
changes in more complex environments than ever
before. Adaptability requires greater absorptive
capacity to transfer best practices and knowledge
(Szulanski, 1996). Absorptive capacity depends
fundamentally on the level of prior related
knowledge, not only basic responsibilities, com-
petences, skills and shared language but also
cutting edge scientific and technological ad-
vances. Because knowledge slack closely related
to new knowledge facilitates absorptive capacity,
this capacity requires more, not less, knowledge
slack (Cohen and Levinthal, 1990; Nonaka and
Takeuchi, 1995; Zahra and George, 2002).
Employees’ ability, with educational back-
ground and acquired job-related competences or
skills, forms part of the prior related knowledge
and knowledge slack the organization must
assimilate, implement, transform and use (Cohen
and Levinthal, 1990). Knowledge slack is essen-
tial to the organization’s ability to absorb and
develop knowledge and intellectual capital. Yet
the mere existence of knowledge slack or invest-
ment in its development is not enough. Effective
development of absorptive capacity requires
other elements: intensity of the effort to develop
it, investment in research and development,
structural configuration and external factors
(e.g. Cohen and Levinthal, 1990; Nonaka and
Takeuchi, 1995; Van den Bosch, Volberda and de
Boer, 1999). Thus:
H6: Knowledge slack will be positively asso-
ciated with absorptive capacity.
Various job-related issues and tasks are not
specified completely; they cannot be easily
written or documented. They are based on tacit
knowledge that is difficult to acquire, implement,
r 2007 British Academy of Management.
303
transform, transfer and use without absorptive
capacity (Winter, 1987; Zander and Kogut,
1995). There is thus a direct relation between
tacit knowledge and absorptive capacity (Cohen
and Levinthal, 1990). Absorptive capacity is
dynamic and extends to the capacities to acquire,
assimilate, transform and apply the tacit knowl-
edge needed to create other capacities and
ultimately to promote change in the organization
(Zahra and George, 2002).
The greater the capacity to absorb tacit
knowledge from other members, the greater the
shared philosophy and the easier it is to work in
the organization. Employees can bring others’
mental models and ways of acting to the surface,
understand them, and attain shared understand-
ing of tacit assumptions and interrelations
(Senge, 1990). Absorptive capacity is not passive.
CEOs should devote more time to fostering it to
achieve the socialization or transformation of
tacit individual knowledge into tacit organiza-
tional knowledge (Nonaka and Takeuchi, 1995)
to establish shared mental models (cognitive tacit
knowledge) and technical skills (technical tacit
knowledge) (Senge et al., 1994). Thus:
H7: Absorptive capacity will be positively
associated with tacitness.
In an organizational context, processes of
knowledge creation and learning generation begin
in both the epistemological dimension (tacit/
explicit) and the ontological dimension (indivi-
dual/social). Knowledge creation expands and
internalizes individual knowledge to help ground
organizational knowledge (Nonaka and Takeu-
chi, 1995) through socialization (conversion from
tacit to tacit), externalization (tacit to explicit),
combination (explicit to explicit) and internaliza-
tion (explicit to tacit). The two-way interaction
between explicit and tacit knowledge creates
value for the organization, promoting organiza-
tional learning and innovation (Senge, 1990).
Although both types of knowledge are positively
related to organizational learning, tacit knowl-
edge is of greater interest, due to its role in
sustainable competitive advantage (Nonaka and
Takeuchi, 1995). Thus:
H8: Tacitness will be positively associated with
organizational learning.
Different types of organizational learning (adap-
tive/generative) and innovation (incremental/radical)
304 V.J. Garcı´a-Morales, F. J. Llore´ns-Montes and A. J. Verdú-Jover
are closely and positively linked (Forrester,
2000). The deeper innovation reaches, the greater
the degree of learning required. Thus, the
more innovative the products, services or meth-
ods, the more critical capacities, skills and new
and relevant knowledge necessary (Senge, 1990).
Organizational knowledge creation, by which
new knowledge is drawn from existing knowl-
edge (organizational learning), is the cornerstone
of innovative activities. It is the process that
strengthens innovation, not knowledge of
itself (Nonaka and Takeuchi, 1995). Further,
organizational innovation depends on the orga-
nizational knowledge base promoted by organi-
zational learning (Cohen and Levinthal, 1990).
Strategic literature on organizational learning
demonstrates the following relationships (among
others): good organizational design increases
organizational learning, increasing innovation;
new products/services or production/service
methods are achieved through organizational
learning; organizational learning models are
applied to specific aspects of the innovation
process (Cohen and Levinthal, 1990; Glynn,
1996; Hurley and Hult, 1998). In short, if
innovation is to emerge, organizations need
highly effective organizational learning (Glynn,
1996). Organizations are thus analysing innova-
tion as an organizational learning process
(MERIT, 1992). Thus:
H9: Organizational learning will be positively
associated with innovation.
Performance outcomes of tacitness, organizational
learning and innovation
Firms that can accumulate rare, valuable, non-
substitutable resources and capacities that are
difficult to imitate will attain an advantage over
competing firms (Barney, 1991). According to
resources and capacities theory, knowledge is one
of the most important resources the firm can
manage. This is especially true of tacit knowl-
edge, which enables firms to maintain competi-
tive advantages (Grant, 1996) and is related to
organizational learning and innovation (Nonaka
and Takeuchi, 1995). Tacit knowledge is one of
the organization’s greatest strategic resources, as
the ability to obtain, share and use tacit knowl-
edge is one of the most important capacities for
maintaining sustainable competitive advantage
and generating organizational wealth (Kogut and
Zander, 1996; Nonaka and Takeuchi, 1995).
Unlike tangible resources, tacit knowledge
cannot be easily commercialized or appropriated.
Because tacit knowledge must be obtained
through similar experiences (Grant, 1996), acquir-
ing it takes time, making it difficult to achieve
(Zack, 1999). Thus, tacit knowledge constitutes a
sustainable competitive advantage and contri-
butes to better performance (e.g. return on assets,
return on equity). As tangible assets and resources
yield smaller competitive advantages, research is
focusing more on the development of intangible
assets and resources (Whitehill, 1997). Thus:
H10: Tacitness will be positively associated
with performance.
Organizational learning’s influence on perfor-
mance should be analysed empirically, since little
knowledge is available on the mechanisms for
transforming organizational learning into perfor-
mance (Snyder and Cummings, 1998). It is wrong
to assert that an increase in organizational
learning (e.g. use of new knowledge, critical
capacities, skills) always increases performance
(e.g. return on assets, equity or sales), since
learning may not always improve an organiza-
tion’s results. Nonetheless, generally speaking,
organizational learning improves performance
(e.g. Argyris and Schön, 1996; Morgan and
Turnell, 2003; Senge, 1990).
In all sectors, firms that show greater breadth,
depth and speed of organizational learning
normally perform better (Hurley and Hult,
1998). Yet encouraging a spirit of organizational
learning sacrifices some immediate performance
to achieve future performance, since immediate
performance grows from yesterday’s organiza-
tional learning, while future performance will be
the product of today’s organizational learning
process (Senge, 1990). Taking this time lag into
account, we propose the following hypothesis.
H11: Organizational learning will be positively
associated with performance.
Finally, the more valuable, imperfectly imita-
ble and rare innovations are, the higher perfor-
mance will be. Organizations with greater
innovation will achieve better response from the
environment, obtaining the capabilities needed to
increase organizational performance and consol-
idate sustainable competitive advantage more
r 2007 British Academy of Management.
Transformational Leadership and Organizational Performance
easily (Hurley and Hult, 1998). Not promoting
innovative projects, products, services, methods
and activities will affect productivity and organi-
zational performance negatively (Lööf and Hesh-
mati, 2002). Although some research does not
establish a direct relationship due to its focus on
other aspects of innovation (e.g. innovation
speed, design innovation) and performance, we
would argue that most aspects are positively
linked to organizational improvement (Danneels
and Kleinschmidt, 2001). Thus:
H12: Innovation will be positively associated
with performance.
Influence of size on strategic variables analysed
The specialized literature considers size one of the
factors influencing the variables analysed (e.g.
Cohen and Levinthal, 1990; Nonaka and Takeu-
chi, 1995; Podsakoff, Mackenzie and Bommer,
1996; Senge et al., 1994). Theoretically, large
organizations are more capable of mobilizing the
resources required – e.g. absorptive capacity,
organizational learning or innovation. They have
the tacitness and knowledge slack to establish
comprehensive science and technology networks.
They usually have more specialized, professional
and skilled workers, who can benefit from
transformational leadership (Bryant, 2003).
However, empirical research on the relationship
between firm size and these variables yields
contradictory results on which firm size is most
conducive to transformational leadership, knowl-
edge slack, absorptive capacity, tacitness, orga-
nizational learning and innovation (McGill and
Slocum, 1993). Nothing indicates that these are
factors exclusively of large firms. Academic
circles show little consensus on the magnitude
or even the direction of the relationship. Thus:
H13: Size will be positively associated with
strategic variables that affect organizational
performance.
Method
Sample and procedure
We first interviewed CEOs, consultants and
academics interested in strategic variables to
analyse the main difficulties with the question-
r 2007 British Academy of Management.
305
naire, give suggestions and confirm that the items
would provide the information desired. Based on
interviews, we drew up a structured questionnaire
to understand better how CEOs face these issues.
We then established a reliable list of the CEOs of
the organizations, with the help of partial
funding from the Spanish Ministry of Science
and Research. We surveyed CEOs because they
know the most about each organization, and
their perception of strategic factors is essential for
the improvement of organizational performance.
The study population consisted of companies
with the greatest turnover in Spain according to
the Dun and Bradstreet Spain (2000) database in
the four sectors analysed (food farming, manu-
facturing, construction and services). A sample of
900 organizations was selected randomly from
this source. We made several calls and visits to
each business to increase the percentage of
response. We explained that we hoped to measure
CEOs’ perceptions of the variables analysed.
The CEOs knew that the data obtained would
be confidential and would be treated in aggregate
form. We offered to send them a comparative
study specific to their firm of the variables
analysed. This enabled us to obtain 408 valid
responses, an approximate response rate of 45%
(Table 1). The possibility of non-response bias
was checked by comparing the characteristics of
the respondents to those of the original popula-
tion sample. A series of chi-square and t statistics
revealed no significant differences between re-
spondents and sample or between early and late
respondents. Nor did we find significant differ-
ences based on type of business or size.
Measures
Before constructing the causal relations model,
we evaluated the psychometric properties of the
constructs that we wished to include in the model,
using the program Lisrel 8.30 and confirmatory
factor analysis on each construct. To ensure
reliability of the indicator, we confirmed that the
factor loads should be higher than 0.4 and
significant (t41.96; po0.05), and individual
reliability was above 50%. Once the individual
reliability of each indicator was assured, we
studied the composite reliability of each whole
scale by applying the Cronbach alpha, composite
reliability (40.7) and average variance extracted
(40.5). For knowledge slack, the inter-item and
306 V.J. Garcı´a-Morales, F. J. Llore´ns-Montes and A. J. Verdú-Jover

Table 1. Technical details of the research

Food farming Manufacturing Sector Services Total

construction

Sample size 130 160 325 285 900

Response size (%) 53 (40.7%) 52 (32.5%) 140 (43.07%) 163 (57.19%) 408 (45.3%)
Profits 11,419,230h 4,474,896h 8,414,169h 19,232,387h 11,813,105h
Assets 13,823,278h 35,459,714h 19,833,399h 408,688,230h 181,701,570h
Net worth 5,168,704h 41,469,835h 13,823,278h 174,293,510h 87,124,070h
Cash flow 27,045,545h 24,040,484h 18,631,375h 22,237,448h 22,997,551h
Own resources 84,141,695h 90,151,816h 150,253,030h 102,172,060h 101,921,640h
Geographical location Spain
Methodology Structured questionnaire
Procedure Stratified sample with proportional allocation (sectors and size)
Universe of population 50,000 companies
Sample error 4.8%
Confidence level 95%, p q 5 0.50; Z 5 1.96
Period of data collection From September to December 2001

item-total coefficients were higher than the
minimum required.
Transformational leadership. The strategic lit-
erature includes research that measures transfor-
mational leadership (e.g. Kusunoki, Nonaka and
Nagata, 1998). We used the scales designed by
Podsakoff, Mackenzie and Bommer (1996) for
diverse aspects of transformational leadership and
established a scale of five items (see the Appendix)
to reflect CEOs’ perceptions of transformational
leadership in the organization. (We test not CEOs’
transformational style but their perceptions of
transformational leadership in the organization.)
Using a confirmatory factor analysis (w25 5 16.24,
root mean squared error of approximation
(RMSEA) 5 0.07, normed fit index (NFI) 5 0.98,
non-normed fit index (NNFI) 5 0.97, comparative
fit index (CFI) 5 0.98), we validated our scales
and then verified each scale’s unidimensionality
and its high validity and reliability (a 5 0.851).
Knowledge slack. We selected two items from the
work of Szulanski (1996) to construct a scale to
determine knowledge slack (see the Appendix). We
analysed the manager’s self-perception of the degree
of knowledge slack easily available in the organiza-
tion. Our procedure is similar to the two self-report
items used by Sharma (2000) to measure ‘discre-
tionary slack’. The scale showed unidimensionality
and high validity and reliability (a 5 0.746).
Absorptive capacity. Various studies have devel-
oped scales to measure and evaluate absorptive
capacity (Lane, Salk and Lyles, 2001; Szulanski,
1996). We selected five items from work by
Szulanski (1996) to construct a scale to determine
absorptive capacity. We developed a confirma-
tory factor analysis to validate our scales. This
required deletion of item 1 (w21 5 0.01, RMSEA 5
0.01, NFI 5 0.99, NNFI 5 0.99, CFI 5 0.99). The
scale was unidimensional. The procedure allowed
us to choose four items (see the Appendix) with
high validity and reliability (a 5 0.850).
Tacitness. Using scales established by Szulanski
(1996), Zander and Kogut (1995) and Simonin
(1999), we drew up a four-item scale (see the
Appendix) to reflect CEOs’ perceptions of knowl-
edge tacitness in the organization. (As before, we
test not actual degree of tacit knowledge but
CEOs’ perceptions of it.) We developed a con-
firmatory factor analysis to validate our scales
(w22 5 0.01, RMSEA 5 0.01, NFI 5 0.99, NNFI 5
0.99, CFI 5 0.99). The scale was unidimensional
and presented high reliability (a 5 0.797).
Organizational learning. Various studies mea-
sure learning in organizations (e.g. Edmondson,
1999; Lähteenmäki, Toivonen and Mattila,
2001). We used the first two items from the scale
of Kale, Singh and Perlmutter (2000) and added
two items based on Edmondson (1999). We
developed a confirmatory factor analysis to
validate our scales (w22 5 4.04, RMSEA 5 0.05,
NFI 5 0.99, NNFI 5 0.99, CFI 5 0.99) and
showed that the four-item scale was unidimen-
sional and had high reliability (a 5 0.919). We

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Transformational Leadership and Organizational Performance
also requested information on specific aspects of
organizational learning (see the Appendix).
Innovation. Many researchers analyse organiza-
tions’ innovation with reliable valid measurement
scales (e.g. Kusunoki, Nonaka and Nagata, 1998;
Miller and Friesen, 1983). We based our scale on
Miller and Friesen’s work (1983). The confirma-
tory factor analysis to validate our scales
required deletion of item 1. The scale was
unidimensional. The procedure enabled selection
of three items (see the Appendix) with high
validity and reliability (a 5 0.753). A seven-point
Likert scale (1 ‘totally disagree’, 7 ‘totally agree’)
for this and all prior variables allowed managers
to express agreement or disagreement.
Performance. After reviewing how performance
is measured in different studies of strategic
research (e.g. Homburg, Krohmer and Workman,
1999; Kusunoki, Nonaka and Nagata, 1998), we
drew up a four-item scale to measure organiza-
tional performance. We developed a confirmatory
factor analysis to validate our scale (w22 5 0.97,
RMSEA 5 0.01, NFI 5 0.99, NNFI 5 0.99, CFI 5
0.99) and showed that the four-item scale (see the
Appendix) was unidimensional with high reliabil-
ity (a 5 0.882). Scales that evaluate performance
according to the main competitors have been
widely used in recent studies. A seven-point Likert
scale (1 ‘much worse than my competitors, 7
‘much better than my competitors’) allowed
managers to express firm performance with respect
to its competitors. Scholars have established high
correlation and validity between objective and
subjective data on performance, implying that
both are valid when calculating firm performance
(Homburg, Krohmer and Workman, 1999). We
correlated individual objective items with corre-
sponding perceptual indicators used in the research
and found high and significant correlations (0.791,
po0.001, for return on assets; 0.777, po0.001, for
return on equity; 0.722, po0.001, for return on
sales; and 0.726, po0.001, for market share).
Size. We analysed the need to use organization
size to control for potential differences. The size
indicators initially used were annual turnover and
number of employees. Both indicators were
highly and significantly correlated in this sample,
and we chose to use number of employees. The
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307
logarithm of an organization’s number of em-
ployees was used to measure size.
Model and analysis
The Lisrel 8.30 program tested the theoretical
model proposed. Figure 1 shows the model and
the hypotheses to be contrasted. We used a
recursive non-saturated model, taking size (x1) as
an exogenous latent variable; transformational
leadership (Z1) as a first-grade endogenous latent
variable; and knowledge slack (Z2), absorptive
capacity (Z3), tacitness (Z4), organizational learn-
ing (Z5), innovation (Z6) and performance (Z7) as
second-grade endogenous latent variables.
Results
This section presents the main results of our
research. Table 2 reports the means and standard
deviations for all of the measures, as well as the
inter-factor correlations matrix for the study
variables. Consistent with the two-step approach
advocated by Anderson and Gerbing (1988), we
estimated a measurement model before examin-
ing structural model relationships. We used Lisrel
8.30 to estimate the model.
From Table 3, we can see that all indexes show
very good fit with the model. The constructs
display satisfactory levels of reliability, indicated
by composite reliabilities ranging from 0.80 to
0.97 and average variance extracted coefficients
from 0.51 to 0.89. Convergent validity can be
judged by examining the significance of the factor
loadings and the average extracted variance
(40.50). All multi-item constructs met this
criterion, with loading (l) significantly related
to its underlying factor (t values415.87) in
support of convergent validity. Discriminant
validity was established between each pair of
latent variables by constraining the estimated
correlation parameter between them to 1.0 and
performing a chi-square difference test on the
values obtained for the constrained and uncon-
strained models. The resulting significant differ-
ences in chi-square indicate that the constructs
are not perfectly correlated and that discriminant
validity is achieved among all constructs. We also
confirm that the confidence interval for the cor-
relation between each pair of critical dimensions
308 V.J. Garcı´a-Morales, F. J. Llore´ns-Montes and A. J. Verdú-Jover

1 H6(+) 2
Knowledge Absorptive
Slack Capacity

H7(+)
H2(+)

H1(+) 3
H13(+) Tacitness
H10(+)
H13(+) H8(+)
H3(+)
H4(+) 4
H11(+)
Organizational 6
Learning Performance
1
Transformational
Leadership H13(+)
H9(+)
H13(+)
H5(+)
H13(+) H12(+)
5
Innovation
H13(+)

2
Size

Figure 1. Hypothesized model

Table 2. Means, standard deviations and correlations

Variables Mean SD 1 2 3 4 5 6 7 8

1. Transformational 5.220 0.943 1.000

leadership
2. Knowledge slack 5.062 1.512 0.240*** 1.000
3. Absorptive capacity 5.222 0.983 0.650*** 0.257*** 1.000
4. Tacitness 4.775 1.337 0.380*** 0.260*** 0.465*** 1.000
5. Organizational learning 5.372 1.145 0.473*** 0.249*** 0.461*** 0.265*** 1.000
6. Innovation 4.626 1.126 0.456*** 0.292*** 0.354*** 0.306*** 0.618*** 1.000
7. Performance 4.679 1.081 0.564*** 0.223*** 0.503*** 0.278*** 0.603*** 0.605*** 1.000
8. Size 1.752 0.500 0.051 0.128** 0.024 0.048 0.042 0.008 0.025 1.000

**po0.01; ***po0.001 (two-tailed).

does not produce a value of 1, which shows
discriminant validity (Anderson and Gerbing,
1988).
Table 4 presents the results for the structural
model in Figure 2. Structural equation modelling
was performed to estimate direct and indirect
effects using Lisrel with the correlation matrix
and asymptotic covariance matrix as input. The
overall fit of the structural model was good, and
the completely standardized path estimates in-
dicate significant relationships among the con-
structs. If we examine the standardized parameter
estimates, we see that transformational leader-
ship strongly affects knowledge slack (b21 5 0.49,
po0.001). As predicted by Hypothesis 1, trans-
formational leadership fosters resources and
prior knowledge that facilitate development of
the organization’s members. Transformational
leadership also affects absorptive capacity di-
rectly (b31 5 0.76, po0.001). Further, transfor-
mational leadership has an indirect effect (0.07,
po0.05) on absorptive capacity due to knowl-
edge slack (0.49  0.14; see Bollen (1989) for
calculation rules). The global influence of trans-
formational leadership on absorptive capacity is
thus 0.83 (po0.001). Although this supports
Hypothesis 2, the influence of transformational
leadership on absorptive capacity is affected by

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Transformational Leadership and Organizational Performance 309

Table 3. Measurement model results

b
Variables Items l*a R2 CRc AVEd Correlation confidence Goodness of
interval fit statistics

Transformational LEADER1 0.84*** (37.79) 0.71 0.922 0.703 TL–KS 0.40–0.57 w2255 5 380.73
leadership (TL) LEADER2 0.82*** (33.45) 0.67 TL–AC 0.85–0.93 (p 5 0.01)
LEADER3 0.85*** (39.54) 0.71 TL–T 0.63–0.76 GFI 5 0.98
LEADER4 0.82*** (36.58) 0.67 TL–OL 0.73–0.84 AGFI 5 0.97
LEADER5 0.87*** (45.40) 0.75 TL–I 0.73–0.84 CN 5 292.92
Knowledge slack (KS) KSLACK1 0.77*** (19.11) 0.60 0.805 0.674 TL–P 0.77–0.86 NFI 5 0.97
KSLACK2 0.87*** (19.90) 0.75 KS–AC 0.42–0.59 NNFI 5 0.99
Absorptive ACAP2 0.90*** (42.06) 0.81 0.930 0.769 KS–T 0.32–0.50 IFI 5 0.99
capacity (AC) ACAP3 0.88*** (44.70) 0.78 KS–OL 0.38–0.56 NCP 5 125.73
ACAP4 0.81*** (30.60) 0.65 KS–I 0.40–0.58 RFI 5 0.96
ACAP5 0.91*** (31.23) 0.84 KS–P 0.37–0.54 CFI 5 0.99
Tacitness (T) TACIT1 0.76*** (22.27) 0.57 0.807 0.513 AC–T 0.71–0.83 RMSEA 5 0.03
TACIT2 0.73*** (20.64) 0.53 AC–OL 0.66–0.78
TACIT3 0.64*** (15.87) 0.51 AC–I 0.63–0.77
TACIT4 0.66*** (16.12) 0.54 AC–P 0.70–0.81
Organizational OL1 0.94*** (79.98) 0.89 0.970 0.892 T–OL 0.52–0.66
learning (OL) OL2 0.93*** (75.76) 0.87 T–I 0.47–0.63
OL3 0.92*** (69.78) 0.85 T–P 0.55–0.69
OL4 0.98*** (38.44) 0.96 OL–I 0.83–0.92
Innovation (I) INNO2 0.80*** (28.88) 0.64 0.881 0.713 OL–P 0.83–0.82
INNO3 0.88*** (42.17) 0.77 I–P 0.86–0.94
INNO4 0.85*** (33.42) 0.73 TL–Size ( 0.06)–0.12
Performance (P) PERF1 0.86*** (44.23) 0.75 0.949 0.824 KS–Size 0.08–0.27
PERF2 0.92*** (52.46) 0.85 AC–Size 0.00–0.18
PERF3 0.90*** (57.06) 0.80 T–Size 0.02–0.19
PERF4 0.95*** (61.44) 0.90 OL–Size ( 0.08)–0.11
I–Size ( 0.06)–0.13

Notes: al*, standardized structural coefficient (Student’s t values are shown in parentheses); bR2, reliability; cCR, composite
reliability; dAVE, average variance extracted; ***po0.001 (two-tailed).
GFI, goodness of fit index; AGFI, adjusted goodness of fit index; CN, critical N; IFI, incremental fit index; RFI, relative fit index.

knowledge slack. Transformational leadership
affects tacitness directly (b41 5 0.22, po0.05)
and indirectly (0.50, po0.001) by absorptive
capacity (0.76  0.61) and knowledge slack–
absorptive capacity (0.49  0.14  0.61). The
global influence of transformational leadership
on tacitness is 0.72 (po0.001), supporting Hy-
pothesis 3.
Transformational leadership affects the dy-
namic capabilities of organizational learning and
innovation, supporting Hypotheses 4 and 5,
respectively. The intensity of organizational learn-
ing appears to be influenced strongly by transfor-
mational leadership (b51 5 0.62, po0.001), such
that a transformational style of leadership im-
proves the development of learning in the
organization. The global effect is 0.74 (po0.001)
due to the indirect effects (0.12, po0.05) of
transformational leadership on organizational
learning by knowledge slack–absorptive capa-
city–tacitness (0.49  0.14  0.61  0.17), absorp-
tive capacity–tacitness (0.76  0.61  0.17) and
tacitness (0.22  0.17).
Analysis of the relation between transforma-
tional leadership and innovation shows a direct
and significant relationship (b61 5 0.37, po0.001)
and an indirect relationship (0.40, po0.001) by
tacitness–organizational learning (0.22  0.17 
0.54), knowledge slack–absorptive capacity–
tacitness–organizational learning (0.49  0.14 
0.61  0.17  0.54), absorptive capacity–tacitness–
organizational learning (0.76  0.61  0.17 
0.54) and organizational learning (0.62  0.54).
The total effect (direct plus indirect) of trans-
formational leadership on innovation shows
a significant and positive relationship (0.77,
po0.001). Transformational leadership affects
all strategic variables analysed intensely and
shows the greatest relation to absorptive capacity
(0.83, po0.001).

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 310

Table 4. Structural model results (direct, indirect and total effects)

Effect from To Direct effectsa t Indirect effectsa t Total effectsa t

Transformational leadership Knowledge slack 0.49*** 9.27 0.49*** 9.27

Transformational leadership Absorptive capacity 0.76*** 16.30 0.07* 2.45 0.83*** 24.20
Transformational leadership Tacitness 0.22* 2.07 0.50*** 5.47 0.72*** 14.34
Transformational leadership Organizational learning 0.62*** 8.11 0.12* 2.00 0.74*** 20.39
Transformational leadership Innovation 0.37*** 5.42 0.40*** 7.30 0.77*** 18.10
Transformational leadership Performance 0.74*** 21.08 0.74*** 21.08
Knowledge slack Absorptive capacity 0.14* 2.48 0.14* 2.48
Knowledge slack Tacitness 0.08* 2.28 0.08* 2.28
Knowledge slack Organizational learning 0.01 1.41 0.01 1.41
Knowledge slack Innovation 0.01 1.37 0.01 1.37
Knowledge slack Performance 0.02* 1.96 0.02* 1.96
Absorptive capacity Tacitness 0.61*** 5.57 0.61*** 5.57
Absorptive capacity Organizational learning 0.10w 1.84 0.10w 1.84
Absorptive capacity Innovation 0.05w 1.77 0.05w 1.77
Absorptive capacity Performance 0.17** 3.38 0.17*** 3.38
Tacitness Organizational learning 0.17* 1.97 0.17* 1.97
Tacitness Innovation 0.09w 1.88 0.09w 1.88
Tacitness Performance 0.20*** 3.63 0.08* 1.97 0.28*** 4.14
Organizational learning Innovation 0.54*** 7.92 0.54*** 7.92
Organizational learning Performance 0.19* 2.46 0.32*** 5.37 0.51*** 8.71
Innovation Performance 0.59*** 7.10
Size Transformational leadership 0.01 0.25 0.01 0.25
Size Knowledge slack 0.15** 2.93 0.01** 0.25 0.14** 2.73
Size Absorptive capacity 0.03 1.02 0.01 0.28 0.04 0.99
Size Tacitness 0.05 1.09 0.03 0.69 0.08 1.38
Size Organizational learning 0.03 0.71 0.01 0.14 0.02 0.49
Size Innovation 0.01 0.35 0.02 0.44 0.01 0.10
Size Performance 0.01 0.19 0.01 0.19
Goodness of fit statistics w2265 5 392.20 (p 5 0.01), GFI 5 0.98, AGFI 5 0.97, ECVI 5 1.73, AIC 5 618.20, CAIC 5 1170.01, CN 5 294.45, NFI 5 0.97, NNFI 5 0.99,
IFI 5 0.99, PGFI 5 0.69, PNFI 5 0.73, NCP 5 127.20, RFI 5 0.96, CFI 5 0.99, RMSEA 5 0.03

Notes: aStandardized structural coefficients; wpo0.10; *po0.05; **po0.01; ***po0.001.

PGFI, parsimony goodness of fit index; PNFI, parsimony normed fit index.
V.J. Garcı´a-Morales, F. J. Llore´ns-Montes and A. J. Verdú-Jover

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Transformational Leadership and Organizational Performance
*po0.05; **po0.01; ***po0.001
Figure 2. Results of the structural equation model
The influences between these strategic variables
show that knowledge slack affects absorptive
capacity (b32 5 0.14, po0.05), absorptive capa-
city affects tacitness (b43 5 0.61, po0.001), tacit-
ness affects organizational learning (b54 5 0.17,
po0.05) and organizational learning affects
innovation (b65 5 0.54, po0.001), supporting
Hypotheses 6, 7, 8 and 9. Having more resources
and knowledge available strengthens the organi-
zation’s absorptive capacity. Absorptive capacity
generates greater organizational skill in manag-
ing tacit knowledge, which in turn helps to make
the organization a learning organization and
ultimately affects innovation. Thus, absorptive
capacity is influenced mainly by transformational
leadership (0.83, po0.001), but also by knowl-
edge slack and size. It is explained very well by
the proposed model (R2 5 0.70). Transforma-
tional leadership has the strongest influence on
tacitness (0.72, po0.001) compared to absorptive
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311
capacity and size (R2 5 0.65); and on knowledge
slack (0.49, po0.001), compared to size
(R2 5 0.27). Finally, organizational learning
(R2 5 0.56)/innovation (R2 5 0.73) are explained
primarily by transformational leadership (0.74,
po0.001/0.77, po0.001), but organizational
learning is also explained by knowledge slack,
absorptive capacity, tacitness and size; and
innovation by knowledge slack, absorptive capa-
city, tacitness, organizational learning and size.
We confirm that tacitness, organizational
learning and innovation affect performance.
Tacit knowledge enables improvement in organi-
zational performance, both directly (b74 5 0.20,
po0.05) and indirectly by improving other
strategic organizational capacities. Tacitness acts
indirectly (0.08, po0.05) through organizational
learning (0.17  0.19) and organizational learn-
ing–innovation (0.17  0.54  0.59), producing a
global effect (0.28, po0.001). This supports
312 V.J. Garcı´a-Morales, F. J. Llore´ns-Montes and A. J. Verdú-Jover
Hypothesis 10. Hypothesis 11 holds because the
parameter estimates verify a positive and statis-
tically significant association between organiza-
tional learning and performance (0.51, po0.001),
both directly (b75 5 0.19, po0.05) and indirectly
(0.32, po0.001) by innovation (0.54  0.59). The
positive significant relationship between innova-
tion and performance (b76 5 0.59, po0.001)
supports Hypothesis 12. Of all the variables,
transformational leadership shows the greatest
influence on performance (0.74, po0.001). This is
very well explained by the model proposed
(R2 5 0.80).
Size was considered as a control variable that
is significant globally for knowledge slack (0.14,
po0.01). The results show that size influences
knowledge slack, but is not significant for
the other variables, supporting Hypothesis 13
only partially. Table 4 shows other indirect
relationships.
In testing the theoretical framework, we fit
several nested models, each incorporating differ-
ent assumptions about parameters. Comparison
to reasonable alternative models is recommended
to show that a hypothesized model is the best
representation of the data (Bollen, 1989). The
statistical summary in Table 5 indicates that
Model 1 is preferable to the others, supporting
the inclusion of a model with these relationships
among the constructs analysed. The proposed
theoretical model (Figure 2) is the most accep-
table and parsimonious model. If, for example,
we compare Model 1 (theoretical model) to
Model 5, we see that the latter has a worse
RMSEA (H 5 0.011), NFI (H 5 0.01), NNFI
(H 5 0.01), CFI (H 5 0.01), ECVI (D 5 0.25),
AIC (D 5 90.05) and NCP (D 5 125.05), demon-
strating that Model 1 is preferred to Model 5
(Dw2 5 160.05) and that most of these new, direct
relations are not significant.
Discussion and implications
Belief that results are related to the intensity and
kind of leadership in the organization has
continued to inspire questions and research by
professionals and academics. Many studies in-
dicate the need to analyse empirically the causal
connections between transformational leadership
and results (e.g. Bass, 1999; Yulk, 1999). Our
study pursues such questions, using empirical
data to analyse the direct and indirect influence
of knowledge and innovation as mediating
variables on the relation between transforma-
tional leadership and performance. Previous
research has hardly analysed these relationships.
One of the primary contributions of this study
is its verification that transformational leadership
helps to develop a foundation of organizational
knowledge in the organization. In a given
situation, the organization has more knowledge
available and can thus find better solutions
(Nonaka and Takeuchi, 1995). More knowledge
leads to greater perfection in replication (Szu-
lanski, Winter and Cappetta, 2000), while making
it harder for someone outside the organization to
imitate the solutions developed (Grant, 1996).
Less accessible involuntary external knowledge
and imitability contribute to longer-lasting im-
provements in firm performance (Rivkin, 2001).
We also verify that knowledge slack en-
courages absorptive capacity (Cohen and Le-
vinthal, 1990) by enabling more common terms
and meanings in the firm members’ knowledge,
facilitating absorption (Nonaka and Takeuchi,
1995). Transformational leadership also helps to
improve absorptive capacity, allowing organiza-
tions to transfer knowledge better than the
market and other firms and thus improving
organizational performance (Kogut and Zander,
1996). Greater absorptive capacity enables better
transfer of best practices and more effective
average performance (Szulanski, Winter and
Cappetta, 2000). Replacing inefficient practices
and routines with other more efficient ones
improves the organization’s average performance
(Szulanski, 1996).
The development of absorptive capacity also
facilitates the acquisition, transfer and use of tacit
knowledge (Lubit, 2001). Tacit knowledge en-
ables the firm to obtain competitive advantage if
leadership manages it properly, as this knowledge
has the potential not only to be valuable but also
rare or unique, inimitable and non-substitutable
(Barney, 1991; Winter, 1987). Transformational
leadership emphasizes the importance of devel-
oping the abilities of the organization’s members
and exploiting the tacit knowledge in all employ-
ees (Bass and Avolio, 2000). The number of
knowledge workers is increasing, and tacit
knowledge plays a more significant role in all
tasks, requiring more transformational styles
(Nonaka and Takeuchi, 1995).
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 Table 5. Model statistics against theoretical model

Model Descriptiona w2 Dw2 RMSEA NFI NNFI CFI ECVI AIC NCP

1 Theoretical 392.20 0.037 0.97 0.99 0.99 1.73 618.20 127.20

2 With direct relations of knowledge slack and absorptive capacity 559.97 167.77 0.048 0.95 0.98 0.98 1.97 705.97 254.97
to performance
3 With direct relations of knowledge slack, absorptive capacity 559.37 167.17 0.048 0.95 0.98 0.98 1.98 707.37 255.37
and transformational leadership to performance
4 With direct relations of knowledge slack to tacitness, organizational 556.30 164.10 0.048 0.95 0.98 0.98 1.98 708.30 254.30

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learning and innovation/of absorptive capacity to organizational learning
and innovation
5 With direct relations of knowledge slack to tacitness, organizational learning, 552.25 160.05 0.048 0.96 0.98 0.98 1.98 708.25 252.25
innovation and performance/of absorptive capacity to organizational
learning, innovation and performance
6 Only relations of transformational leadership to organizational learning and 862.15 469.95 0.070 0.93 0.95 0.95 2.78 996.15 551.15
innovation/of organizational learning and innovation to performance/of
organizational learning to innovation
7 Without direct relations of transformational leadership to knowledge slack/of 722.52 330.32 0.061 0.94 0.96 0.97 2.40 860.52 413.52
knowledge slack to absorptive capacity
8 Without direct relations of transformational leadership to absorptive 853.77 461.57 0.070 0.93 0.95 0.95 2.77 991.77 544.77
Transformational Leadership and Organizational Performance

capacity/of absorptive capacity to tacitness – With direct relation of

knowledge slack to tacitness
9 Without direct relations of transformational leadership to tacitness/of 828.60 436.4 0.068 0.93 0.95 0.96 2.69 962.60 517.60
tacitness to organizational learning and performance/of absorptive capacity
to organizational learning
10 Without direct relations of transformational leadership to organizational 922.68 530.48 0.074 0.92 0.94 0.95 2.96 1060.68 613.68
learning and innovation/of organizational learning and innovation to
performance/of organizational learning to innovation/of tacitness to
organizational learning – With direct relations of knowledge slack and
absorptive capacity to performance/of knowledge slack to tacitness

Note: an 5 408.
313
314 V.J. Garcı´a-Morales, F. J. Llore´ns-Montes and A. J. Verdú-Jover
Tacit knowledge, together with explicit knowl-
edge, constitutes the epistemological dimension of
organizational learning. The processes of knowl-
edge creation and organizational learning are at
work throughout different stages of socialization
(tacit to tacit), externalization (tacit to explicit),
combination (explicit to explicit) and internaliza-
tion (explicit to tacit). This process has a spiral
form. Once internalization is achieved, the
process begins again, starting from a higher level
of knowledge, generating cognitive evolution with
increasing accumulated knowledge (Nonaka and
Takeuchi, 1995). We also verify that transforma-
tional leadership inspires organizational learning
by helping other members of the organization to
discover their mental models for developing a
systematic vision of the organization (Senge,
1990). Organizations that learn have a structure
that satisfies the requirements for competitive
advantage, making the firm a centre for contin-
uous improvement (Slater and Narver, 1995).
Organizational learning and transformational
leadership are significant in shaping firms’
potential to generate innovation by nurturing
the environment and decision-making that pro-
mote successful generation and implementation
of knowledge (Kanter, 1983; Van de Ven, 1986).
In innovative organizations, leaders learn con-
tinuously, adapting to and initiating changes in
the organization and its environment. Transfor-
mational leadership encourages innovative beha-
viour and strengthens motivation to improve the
organization’s results (Bass and Avolio, 2000).
We thus demonstrate empirically that trans-
formational leadership affects slack knowledge,
absorptive capacity, tacit knowledge, organiza-
tional learning and innovation. Stimulating the
relations between these intermediate variables
permits the creation of positive synergies that
improve organizational performance.
Our research has several implications for
business practitioners. First, organizations must
foster the presence of transformational leaders
and leadership style. Such leaders must be
actively involved in developing people in the
firm. They must inspire followers to pursue a
shared vision and coach them to take greater
responsibility for their development (Bass, 1999),
as human resources are the organization’s most
important asset. The transformational leader’s
actions must also be consistent with his/her
statements (Senge et al., 1994).
Second, the organization should encourage the
acquisition, implementation, transformation and
use of new and relevant knowledge (absorptive
capacity). This develops the ability to give
meaning to, assimilate and use strategic tacit
knowledge to improve performance (Winter,
1987). Absorptive capacity depends mainly on
prior knowledge and knowledge slack (Cohen
and Levinthal, 1990; Szulanski, 1996; Van den
Bosch, Volberda and de Boer, 1999). Leaders
must thus devote continuous and substantial
investment to developing knowledge slack in the
organization. They must also perform the differ-
ent actions on which absorptive capacity de-
pends. These include encouraging more modern
organizational structures and compensation pol-
icies and stimulating organizational flexibility to
encourage better knowledge transfer (Lane and
Lubatkin, 1998; Nonaka and Takeuchi, 1995;
Van den Bosch, Volberda and de Boer, 1999).
Third, leaders should make learning a central
element of strategic intention by investing in it
and speaking publicly about it, eliminating
negative group dynamics that might impede
learning and establishing positive dynamics to
inspire collaborative learning. Strong commit-
ment is needed to manage and disseminate the
learning process at all levels of the firm (Senge
et al., 1994; Wick and León, 1995). The leader
should be a good mentor, capable of guiding the
other members of the firm in their professional
trajectories, supporting their growth because he
or she has faith in people’s capacity to learn and
innovate. The leader should know how to
motivate and teach and how to involve others
in a common project (Senge, 1990).
Fourth, organizational learning and innova-
tion should be stimulated to drive performance.
The leader’s support for innovation is critical
inside and outside the organization. In the
organization, the leader focuses on creating a
context favourable to innovation and organiza-
tional learning. Leaders can do much to prepare
the minds of their organization. Because innova-
tion is not an individual act but a collective
achievement, it takes work to create a context
that legitimates innovative behaviour, dedicates
resources to innovation and assumes the struc-
ture and culture that nourishes the development
and implementation of innovation (Senge et al.,
1994; Van de Ven, 1993). Outside the organiza-
tion, the leader plays an essential role in linking
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Transformational Leadership and Organizational Performance
the organization to its environment by gaining
acceptance (consumers, clients and other interest
groups) and support (resources, knowledge, laws)
for innovation (Van de Ven, 1993).
Limitations and future research
This research has several limitations that suggest
further possibilities for empirical research. First,
survey data based on self-reports may be subject
to social desirability bias (Podsakoff and Organ,
1986). However, assurance of anonymity can
reduce such bias even when responses relate to
sensitive topics (Konrad and Linnehan, 1995).
Second, since all measures were collected in the
same survey instrument, we employed several
techniques to examine the potential for common
method variance. Initially, we used Harman’s
one-factor test. The results indicated the presence
of seven factors (eigenvalues41) that explained
67% of the variance, while the first factor
accounted for 19.23% of the variance. Since
multiple factors emerged and the first factor did
not account for the majority of the variance, a
substantial amount of common method variance
does not appear to be present (Konrad and
Linnehan, 1995; Podsakoff and Organ 1986).
Given the limitations of Harman’s one-factor
test, we used the procedure recommended by
Netemeyer and colleagues, involving two struc-
tural equation models that include a common
method factor (Netemeyer et al., 1997). Our
results show that a same source factor does not
exist. In both models the predicted paths
continue to be consistent with our previous
results in direction and significance, indicating
that common method variance did not influence
our findings.
Third, we concentrated exclusively on four
sectors (food farming, manufacturing, construc-
tion and services). Firms from other sectors may
yield different results. Fourth, our model analyses
only some factors influenced by transformational
leadership. Other factors merit study, such as
strategy, shared vision, teamwork and technology
(Lindley and Wheeler, 2000; Senge, 1990).
Research should also examine other conse-
quences of transformational leadership in firms
(e.g. quality improvement, improvements in
relational capacity). Fifth, the cross-sectional
nature of the research into a series of dynamic
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315
concepts (e.g. innovation, organizational learn-
ing) allows us to analyse only a specific situation
in time of the organizations studied, not their
overall conduct over time. We should consider
the lag between the actions on the independent
variables (tacitness, organizational learning, in-
novation) and the performance outcomes (Ar-
gyris and Schön, 1996; Senge et al., 1994). Other
research (Skarmeas, Katsikeas and Schlegel-
milch, 2002) recommends using an additional
time lag in data collection, but this was not
possible because of cost and time constraints.
Future research should focus on a longitudinal
study.
Sixth and lastly, performance should be
evaluated from a multidimensional perspective
(e.g. Katsikeas, Leonidou and Morgan, 2000;
Morgan, Kaleka and Katsikeas, 2004). Some
prior studies (e.g. Hart and Bandury, 1994;
Venkatraman and Ramanujan, 1986) use the
measures of business performance. These usually
distinguish between different levels of perfor-
mance: financial performance, operational per-
formance and organizational effectiveness. The
narrowest conception of business performance
uses primarily outcome-based financial indicators
(e.g. sales growth, earnings per share) that are
assumed to reflect the fulfilment of the firm’s
economic goals. A broader conceptualization of
business performance would emphasize indica-
tors of operational performance (e.g. market
share, product quality) as well as those of
financial performance. Finally, organizational
effectiveness takes into account other agents
involved in the firm, measuring for example
personnel satisfaction in the organization. Given
the important role of business performance, we
encourage future research to devote closer atten-
tion to measuring business performance from a
multidimensional perspective.
Development of a collaborative scheme be-
tween academics and practitioners could generate
an organizational strategy around the concept of
‘transformational leadership’, permitting further
study of the processes, means and mechanisms by
which to transform this kind of leadership into
sustainable competitive advantage. Future stu-
dies should be based on larger samples, prefer-
ably in more than one country. It would also be
interesting to study similar characteristics with
data provided by lower levels of management and
employees in the firm.
316 V.J. Garcı´a-Morales, F. J. Llore´ns-Montes and A. J. Verdú-Jover

Appendix
Transformational leadership
1. The firm’s management is always on the lookout for new opportunities for the unit/department/
organization.
2. The firm’s management has a clear common view of its final aims.
3. The firm’s management succeeds in motivating the rest of the company.
4. The firm’s management always acts as the organization’s leading force.
5. The organization has leaders who are capable of motivating and guiding their colleagues on the job
(masters).

Knowledge slack
1. The organization relies on abundant resources and prior knowledge slack to foster the training and
development of the new knowledge needed to develop its tasks.
2. There is a continuous and significant amount of investment for the development of knowledge slack
in the organization.

Absorptive capacity
1. The organization has a clear division of roles and responsibilities for acquiring new knowledge.
2. The organization has the necessary skills to implement new acquired knowledge.
3. The organization has the competences to transform the new acquired knowledge.
4. The organization has the competences to use the new acquired knowledge.

Tacitness
1. The usual tasks for jobs in the organization are not completely specified.
2. The procedures for how to act in a specific position in the organization cannot be easily written.
3. There are no manuals on how to develop on-the-job tasks in the organization.
4. There is no documentation to describe the critical parts of the organization’s productive processes.

Organizational learning
1. The organization has acquired and used much new and relevant knowledge that provided
competitive advantage over the last three years.
2. The organization’s members have acquired some critical capacities and skills that provided
competitive advantage over the last three years.
3. Organizational improvements have been influenced fundamentally by new knowledge entering the
organization over the last three years.
4. The organization was a learning organization.
During the last three years:

(a) What are the main and most relevant kinds of knowledge acquired and used by the organization?
What competitive advantage have they provided?
(b) What are the main critical capacities and skills acquired by the organizational members? What
competitive advantage have they provided?
(c) What organizational improvements have been influenced fundamentally by new knowledge
entering the organization?
(d) What shows that the organization is becoming a learning organization?

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Transformational Leadership and Organizational Performance 317

Innovation
Considering anything to be ‘new’ that represents a significant change and taking into account that it
need not be new for your industry or market but only for your firm, indicate the degree of agreement or
disagreement with the following statements. In the last three years:

1. The rate of introduction of new products or services in the organization has grown rapidly.
2. The rate of introduction of new production methods or services rendered in the organization has
grown rapidly.
3. In comparison to its competitors, the organization has become much more innovative.

Performance
Answer the following questions, taking into account your firm’s situation in the last three years. In
relation to your main competitors, what is your firm’s performance in the following areas?

1. The firm’s performance measured by return on assets.

2. The firm’s performance measured by return on equity.
3. The firm’s performance measured by return on sales.
4. The firm’s market share in its main products and markets.

Size
Number of employees in the organization.

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Victor J. Garcı́a-Morales has a PhD in Business Administration from the University of Granada and
is Professor of Management at the same university. His research focuses on organizational learning,
the learning organization, knowledge management, intellectual capital and innovation.

Francisco Javier Lloréns-Montes has a PhD in Business Administration from the University of
Seville. He is a Professor at the University of Granada, where he has served as Head of the
Department of Management. His research focuses on theoretical and empirical analysis of
organizational learning, quality management and innovation.

Antonio J. Verdú-Jover is Professor of Management in the Faculty of Social and Juridical Sciences
at the Miguel Hernandez University. He received his PhD in Management from the University of
Granada. His current research interests include organizational flexibility, manufacturing and fit.

r 2007 British Academy of Management.

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