The Impact of Transformational and Transactional
Leadership Styles on Knowledge Creation in Sri
Lankan Software Industry
Chamilka Athukorala, Indika Perera, Dulani Meedeniya
Department of Computer Science and Engineering
University of Moratuwa, Sri Lanka
achamilka@gmail.com, indika@cse.mrt.ac.lk, dulanim@cse.mrt.ac.lk
Abstract— This study examines leadership factors that affect
knowledge creation in Sri Lankan software industry. For this
study, transformational and transactional leadership styles are
considered and their effect on knowledge creation is assessed.
Organizational culture is considered to have a moderating effect
on the relationship between leadership behaviors and knowledge
creation. The study is based on four variables; two independent
variables, transformational leadership and transactional
leadership, one moderating variable, organizational culture and
one dependent variable, knowledge creation. According to the
findings of the research with participant (n=152) feedback, both
transformational leadership and transactional leadership have
strong positive correlations with knowledge creation.
Organizational culture moderates the correlation between
transactional leadership and knowledge creation. Among the
individual factors of transformational and transactional
leadership, Individualized consideration has the highest positive
correlation with knowledge creation. Organizational culture
found to be moderating the knowledge creation through
transactional leadership while culture has no moderating effect
on knowledge creation through transformational leadership. The
research suggests that affective leadership practices can
positively contribute to the knowledge creation in software
development organizations.
Keywords—Knowledge Creation, Software Industry,
Transfomational Leadership, Transactional Leadership, Software
Project Management
I. INTRODUCTION
Knowledge is one of the most significant resources in
highly competitive industries like software industry. In a
competitive industry, organization’s ability to enhance
employee knowledge and create new knowledge within the
organization indicates the strength of the organization not only
to survive the competition, but to thrive in the field. In order to
sustain competitive advantage of a successful company,
knowledge creation and transfer is vital [1]. Organizational
knowledge can be divided as explicit knowledge and implicit
knowledge. Explicit knowledge is tangible, clearly stated with
consisting details and can be recorded and stored. Implicit or
tacit knowledge on the other hand, is mostly unstated. It is
basically existent within an individual’s experience and
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309
therefore difficult to record and store [2]. Both tacit and
explicit knowledge is equally important for knowledge creation
as both are complementary of one another. Organizations are
capable of bringing innovations forward faster and more
successfully through knowledge creation and using this
innovative knowledge rapidly and effectively. Moreover,
another way of enhancing knowledge creation is practicing
relevant leadership behaviors [3].
Sri Lanka has been ranked at 85th place among 141
countries worldwide in Global innovation index 2015 report
[4]. The technology in an industry like software development
changes and requirement changes are more frequent. Due to
strict deadlines of delivering projects, lack of knowledge
creation may occur within the organization. It is an important
and interesting question, what kinds of leadership behaviors
would be needed to create knowledge within an organization.
Transformational leaders act as a role model and inspire
subordinate by setting a vision. This type of leadership can
motivate followers, set goals for them. In this study, one of the
objectives that will be addressed is to find out the relationship
between transformational leadership and knowledge creation
within the organization. Transactional leadership is about
exchanging goals and rewards. One of the characteristic of
transactional leaders is they work with subordinates and share
clear and specific goals. Therefore, the second objective of the
study is to find out the relationship between transactional
leadership and knowledge creation within organization. At the
same time we examine the moderating effect of organizational
culture on relationship between transactional and
transformational leadership and knowledge creation within the
organization. The reason for considering organizational culture
as a moderating factor is that the process of knowledge creation
happens under the cultural norms and even the influence of
leadership styles get moderated through the cultural factors. To
achieve these objectives we answer the following research
questions: What is the impact of transformational leadership on
organizational knowledge creation? What is the impact of
transactional leadership on organizational knowledge creation?
and whether organizational culture moderates the relationship
between leadership behavior and knowledge creation?
 The next section presents a brief overview about related
literature followed by the methodology section presenting the
research model. Section IV presents the results and analysis
while Section V concludes the paper with future directions for
research
II. LITERATURE REVIEW
A. Knowledge Creation and Management
Bhatt [5] states organization as a “problem facing and
problem solving entity”. Further Bhatt argued individual
knowledge and organizational knowledge are independent
attributes [5]. Nonaka divided organizational knowledge into
tacit and explicit knowledge [2]. Bryant state explicit
knowledge shared in manuals, databases and information
systems [6].
Smith [7] mentioned “tacit knowledge is made up of mental
models, values, beliefs, perceptions insight and assumptions”.
Nonaka et al [8] mentioned tacit knowledge cannot easily
visible or express. It’s hard to share or communicate. Tacit
knowledge comes with “individual experience, ideas and
emotions”. There are two dimensions of tacit knowledge,
technical dimensions and cognitive dimensions.
Explicit knowledge can be shared in the form of data by
expressing using words and numbers. It can also be transferred
from one person to another to share among stakeholders.
Explicit knowledge is technical and needed a level of academic
knowledge. Further, it can be stored and can retrieve whenever
needed. According to [9] Common knowledge is knowledge
common to the organization, which is known by all employees
of the organization and help to work within the organization
and it provides “common frame of reference”. If employees
have lack of common knowledge it will lead to failures and
lack of innovation.
According to [10] cultural knowledge is about
“assumptions and beliefs that are used to describe, and explain
reality, as well as the conventions and expectations that are
used to assign value and significance to new information”.
Cultural knowledge cannot be sorted or arranged but it is
spread over the groups. Popadiuk and Choo indicate a diagram
for organizational knowledge as shown in Fig. 1 [10].
Lindblom and Tikkanen define knowledge management as
“a conscious strategy of getting the right knowledge to the right
people at the right time and helping people share and put
information into action in ways that will improve
organizational competitiveness’’ [11].
The knowledge creation process is explained in [8] where
four processes were presented as follows: Socialization is about
converting tacit knowledge into new tacit knowledge via
interaction with each other and with “shared experience”
among organizational members. Externalization is about
“converting tacit knowledge into explicit knowledge”.
Combination is the process of “converting explicit knowledge
into explicit knowledge”. Internalization is the process of
“converting explicit knowledge into tacit knowledge”.
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Fig. 1. Categories of organizational knowledge (Source [10])
Knowledge creation is one of the major elements in
knowledge process. Other elements are knowledge sharing and
knowledge transfer. Smith, Collin and Clark [12] state existing
knowledge and how much employee extends can access
information within the organization and organizational culture
depend on creating new knowledge within the organization.
According to Maruta knowledge creation can never be done by
logical thinking alone [13]. Further he illustrates “Something
irregular beyond logical thinking may result in its creation” and
it is called “inspiration”. Inspiration can happen from a
technical leader or manager in the company or the strong
intense to solve the issue.
B. Leadership in Organizations
Leadership is defined as “the process of influencing others
towards achieving some kind of desired outcome” [3]. The
researchers who discuss about leadership behaviours and
individual innovation have focused on “transformational
leadership, participative leadership and leader-member
exchange (LMX) theory”. Transformational leaders encourage
subordinate by motivating them to see a problem in different
perspectives and help them to enhance their skills.
De Jong and Hartog discuss participative leadership has an
ability to follow “various decision-making procedures that
determine the extent to which people can influence the leader’s
decisions and have the autonomy to design and perform their
own tasks” [3]. “Participative leadership has different forms,
including consultation, joint decision making and delegation”
as suggested in [14]. Transactional leadership has a positive
relationship with innovation in an organization [3].
When discuss about transactional leadership, those leaders
are more focused on “contractual agreement between the leader
and the subordinate”. Thite argues if subordinates deliver
something beyond ordinary expectation that is only possible
from practicing transformational leadership [15]; he found
successful IT project need to have transformational leadership,
transactional leadership and technical leadership [15].
Transformational and charismatic leaders provide useful
view of how leaders affect knowledge within the organization.
Several elements of transformational leadership theory support
for knowledge creation within the company. Employees are
more productive when they are free to create new ideas and
share those ideas with other employees. Transformational
leaders have challenging vision and strategic goals, which
attract talented employee within the organization. According to
[6] for knowledge workers such as software engineers
transformational leadership is more relevant as software
engineers have more tacit knowledge benefiting the knowledge
creation process.
Chang and Lee mention Transactional leadership is
“oriented by demands” [16]. Transactional leaders exchange of
benefit with a purpose to keep organizational stability. Further
researchers describe transactional leadership clarify goals
according to role of the leader and also the leader encourages
subordinate to achieve these activities.
C. Leadership and Knowledge Creation
Study of [17] state leadership factors “enables other to act”,
“encouragement”, “model the way”, “challenges” and “inspired
by shared vision” has the positive correlation with knowledge
creation. A study given in [18] mentioned leadership has a
strongly effect on knowledge creation. Ability of leader to
motivate subordinate on knowledge creation and innovation is
not only depend on situation but it is a characteristic of the
leader. Further researcher argues “motivation to innovate and
the kind of innovations they are willing to pursue depend on
strategic choices made by leaders based on their perceptions of
environmental risks and opportunities”. In the study researcher
discuss transactional leadership is more important than
transformational leadership when comes to generate ideas.
D. Organizational Culture, Leadership and Knowledge
According to Nonaka three of knowledge conversion
processes has an impact of organizational theory [2].
Socialization has an impact of organizational culture and
combination based on processing of information.
Internalization associated with organizational learning.
Knowledge creation leads to innovation, as an example
organization create an problem, employee try to solve that
problem by generating new ideas or new knowledge, it will
lead into innovation. Leadership and organizational climate has
an effect on innovation [17]. According to [19] clan culture is
a “strategic coordination instrument” which supports
innovation within the organization. Further researchers
mentioned there’s a negative correlation with hierarchical
culture trait with innovation.
III. METHODOLOGY
The purpose of the study is to find the relationship between
the selected two leadership styles and knowledge creation and
to find out organizational culture moderates the relationship
between these leadership factors and knowledge creation. A
quantitative approach is used in this study. To answer the
research questions Transactional leadership and
Transformational leadership used as the independent variables,
Organizational culture is used as the moderating variable and
Knowledge creation is used as the dependent variable.
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Transformational leadership: - Transformational leaders
become a role model for the followers and followers trust the
leader [20].
Transactional leadership: - Transactional leadership is
about a transaction between leader and follower. Leader
defines a goal and reward subordinate if they achieve the goal.
Transactional leaders consider reward or punishment by
considering subordinate performance [20].
Knowledge Creation: - Knowledge creation is about
“generating new idea” [13]. Always knowledge creation occurs
from an individual. When individual share idea and interact
with groups, organizational knowledge creation can be happen.
Knowledge creation occurs within the organization from
transmission process of tacit and explicit knowledge.
Organizational culture: - Organizational culture is about
character or personality of the organization. Denison & Mishra
introduce four components of organizational culture
“involvement, consistency, adaptability, and mission” [21].
Relationship between different variables which are used in
this research can be analyzed using the conceptual model. This
conceptual model is developed using the factors identified
through the literature review. The relationships between the
identified independent variables are verified with the dependent
variable, knowledge creation. Organizational culture identified
as a moderating variable for the research.
Following are the factors considered for each variable:
Transformational leadership - Idealized Influence,
Individualized Consideration, Intellectual Stimulation, and
Inspirational Motivation;
Transactional Leadership - Contingent Reward,
Management by Exception – Active, Management by
Exception – Passive; Knowledge Creation – Socialization,
Combination, Internalization, Externalization; Organizational
Culture – Involvement, Consistency, Adaptability, and
Mission.
Fig. 2. Conceptual model developed for the research
 IV. RESULTS AND ANALYSIS
A. Sample and Data Collection
According to report of National ICT workforce 2013 total
ICT workforce is 78829 (without BPO). Percentages of
software architect 1%, technical leaders 12%, IT managers 5%
according to ICT workforce report 2013 and by assuming QA
leaders 3% and team leaders 10% from ICT workforce.
Population can be considered as 24,437. Therefore in this
study, the sample size is 379. The above sample size is
calculated with the random sampling at a 95% confidence level
and 5% of margin error. A sample of 379 leaders and managers
were selected from Sri Lankan software industry who have
been in the current organization for at least 2 years.
The questionnaire consists of 37 questions in five sections.
A pilot survey with 20 participants was used to refine and
validate the questionnaire. Section one is based on
demographical factors, section two and three focus on
transformational and transactional leadership styles and the
fourth section to measure knowledge creation variable, fifth
section is to measure organizational culture. Questions are
designed in a five point Likert scale, 5 for strongly agree, 4 for
agree, 3 for moderate, 2 for disagree and 1 for strongly
disagree.
B. Data Analysis
Data collection was mainly done by a questionnaire. Part of
the questionnaire was designed by analyzing research papers
related to MLQ by [20]. The research was conducted using the
data collected from 152 leaders and managers of software
engineers. For this sample selection, one basic criterion was
established to collect data from individuals who have at least
two year experience in the current organization.
The four variables, Transformational leadership style,
Transactional leadership style, Knowledge creation, and
Organizational culture were measured from eight questions per
each variable and the reliability analysis of each variable was
sufficiently high as indicated by Cronbach’s Alpha values of
0.685, 0.681, 0.708, and 0.816, respectively. Therefore each
variable was derived from the collection of corresponding
questions set. The respondents of the questionnaire can be
categorized according to the job role, gender and experience in
software industry.
Fig. 3. Sample distribution according to job roles
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Fig. 4. Sample distribution according to experience
As shown in the Fig. 3, 30.8% of the sample is technical
leaders, 27.6% are QA leaders, 24.4% are team leaders, 12.8%
of respondents are senior managers and 4.5% respondents are
software architects. According to National ICT workforce
survey 2013, Software architects, managers and Technical
leaders consist of 1%, 5% and 12% from total ICT workforce,
respectively. The sample consists of 89 male respondents
corresponding to 58.6% of the sample and 63 female
respondents corresponding to 41.4% of the sample. According
to National ICT workforce 2013, the total ICT workforce
consists of 29.7% females and 70.3% males.
Fig. 4 demonstrates that 49.7% of the respondents have 6-
10 year experience in software industry and 30.6% of the
sample possesses 11-15 year experience. A portion of 14% of
the respondents have 16-20 year experience while 5.1% of the
respondents have 1-5 year experience whereas 0.6% of the
respondents were in possession of more than 20 year
experience. According to National ICT workforce survey 2013,
50% of the employees have 1 to 5 year experience, 15% of the
employees have 6 to 8 year experience while 18% of the
employees have over 8 year experience. As the study targets
leaders and managers, sample distribution can be considered as
a fair distribution based on experience.
C. Model Evaluation
The results of the Pearson correlation over the independent
variable Transformational leadership and the dependent
variable Knowledge creation showed a statistically significant
linear correlation between transformational leadership and
knowledge creation at the 0.05 significant level. Since the
derived value for R = 0.659 (>0.5), the correlation between the
two variables can be considered as high. The test was
performed at 95% confidence level. It implied that positive
changes in transformational leadership style will correlate with
the increases in the organizational knowledge creation
The results of the Pearson correlation over the independent
variable “Transactional leadership” and the dependent variable
“Knowledge creation” show a statistically significant linear
correlation between the two at the 0.05 significance level. The
test is performed at 95% confidence level.
Since the derived value for R = 0.601 (> 0.5), it can be
considered that the two variables are highly correlated. The
positive value for “r” is an indication of the positive correlation
between the two variables, which further implies that positive
changes in transactional leadership style is capable of
increasing the organizational knowledge creation.
The Sig. F change value is 0.795, which does not allow for
equal variances to be assumed. The Sig. (2-tailed) value is
greater than 0.05 which indicates that there is no moderating
effect of organizational culture on the relationship between
transformational leadership and knowledge creation.
According to the moderating analysis resulted in a change
in R square of 5.1%, which is the addition of moderating
variable, organizational culture. This addition is statistically
significant as (p < 0.005) and accordingly organizational
culture moderates the relationship between transactional
leadership and knowledge creation.
According to the obtained ANOVA test results,
independent variables (transformational leadership style and
transactional leadership style) and their interaction (knowledge
creation) was significant p<0.005. Since the F = 2.474 and
p<0.005 for the interaction between the independent variables
(transformational and transactional leadership style), it can be
concluded that the interaction between transformational and
transactional leadership styles has a significant effect on
knowledge creation.
From Pearson correlation, there is a positive correlation
between transformational leadership and knowledge creation.
When the transformational leadership factors are analyzed,
individualized consideration has a strong correlation on
knowledge creation compared to other factors with a value of
0.558 owing to the view individual is the ultimate source of
any new idea. Other factors that affect knowledge creation are
individualized influence, R=0.488 and inspirational motivation
which has a correlation of 0.495. The least correlation in a
transformational leadership factor for knowledge creation was
intellectual stimulation which has a value of 0.385. Intellectual
stimulation has a moderate correlation with knowledge creation
as 0.3 < r < 0.5. Moreover, researchers have found out that
transformational leadership, where leader act as a role model,
inspiring subordinate, coaching and understanding their
different needs leading into knowledge creation. It is more so
in Sri Lankan software industry, where coaching and
identifying individual differences and talents and helping them
to enhance their skills have more effect on generating new
ideas.
According to the test results transactional leadership has a
strong positive correlation with knowledge creation. “There is a
positive correlation between transactional leadership and
knowledge creation”. When the dimensions of transactional
leadership are considered, contingent reward, management by
exception - active and management by exception - passive, all
factors have correlations with knowledge creation where
(p<0.005) for all the factors and where contingent reward R =
0.454, management by exception - active R = 0.482 and
management by exception R = 0.424 and for all the factors. All
three factors have moderate positive correlations for
knowledge creation.
When comparing transformational leadership and
transactional leadership effect on knowledge creation,
313
transformational leadership has more effect on knowledge
creation than transactional leadership. Leaders with
transactional leadership style influence subordinate by specific
transaction, leaders with transformational leadership style
result in a “high level of follower performance and
commitment” [6]. In Sri Lankan software industry,
transformational leadership has more effect than transactional
leadership. Two-way ANOVA test has been done to identify
the combined effect of transactional and transformational
leadership for knowledge creation. Results of two-way
ANOVA test indicate that these two leadership styles together
have a significant effect on knowledge creation as p < 0.005.
Moderating effect of organizational culture on
transformational leadership was tested by moderator analysis.
According to the test results “R square” = 0.000 which
indicates there is no effect of organizational culture on
knowledge creation from transformational leadership.
Moderating effect of organizational culture on transactional
leadership was tested using moderator analysis. Accordingly
organizational culture moderates the correlation between
transactional leadership and knowledge creation.
V. CONCLUSION AND RECOMMENDATIONS
When considering the outcomes the most influencing factor
for knowledge creation is Transformational leadership.
Transformational leadership has a positive correlation with
knowledge creation. Factors under transformational leadership
that influence knowledge creation are Individualized
consideration, Intellectual stimulation and Inspirational
motivation. Therefore it can be concluded that transformational
leadership highly influence factor for knowledge creation in Sri
Lankan software industry.
According to Pearson correlation results transactional
leadership has a strong positive correlation with knowledge
creation. This indicates the leaders with transactional
leadership style highly influence knowledge creation within the
organization. Therefore, it can be concluded that the influence
of transactional leadership has a major positive effect on
organizational knowledge creation.
There is no moderating effect of organizational culture on
relationship between transformational leadership and
knowledge creation as well as find out there is a moderating
effect of organizational culture on relationship between
transactional leadership style and knowledge creation.
According to the findings transformational leadership has
more effect on knowledge creation. Out of all transformational
leadership factors, individualized consideration has more effect
on knowledge creation. Therefore small teams managed by an
immediate supervisor, are preferred for a software development
company as then the leader can focus more on each subordinate
individually. This will help the leaders to identify different
talents possessed by their subordinates and their needs to align
those with the knowledge creation activities.
The least influencing transformational leadership factor in
knowledge creation is intellectual stimulation. Leaders and
managers of the organization need to encourage subordinates to
think out-of-the-box and analyze problems in different angles
so that they can propose innovative solutions in their project
tasks to achieve the expected project goals.
According to the research findings contingent rewards is
one of the transactional leadership factors moderately effects
on knowledge creation. Contingent reward is a motivational
factor, which drives employee to achieve project goals and
objectives. Participant rankings given to the questions related
to contingent rewards in the survey are observed to be
comparatively low. Rewarding needs to be a more effective
practice in Sri Lankan software industry and also leaders and
managers need to make sure that their subordinates receive
appropriate rewards for their performance.
The research outcome also suggests a number of further
studies that can be extended from this work. A qualitative
research related to the research focus with a general view such
as, leadership factors that affect knowledge creation in Sri
Lankan software industry can also be recommended as a
fruitful future extension by interviewing subordinates, leaders
and managers. Also, a research study can be undertaken to
identify the major leadership factors without just limiting to
leadership styles, which has contributed to the organizational
knowledge creation and also finding out moderating and
extraneous variables.
There are several practical implications of this research
which can be directly applicable to the software development
industry with positive contributions towards successful
knowledge creation. This can bring new innovations with right
leadership to an organization making them strongly
competitive. One of the important factors for new idea
generation is a positive healthy relationship between
leaders/management and subordinate. Employees need a sense
of being treated fairly and respectfully. Managers and leaders
have to communicate expectations, and make sure that
subordinates have the necessary resources; skills as well as a
healthy project environment to fulfill those expectations. All
factors under transformational and transactional leadership
styles have a moderate correlation with knowledge creation
except individualized consideration. Therefore organizations
can focus more on building small teams within the organization
as leaders can individually focus on subordinate and help them
to enhance their skills while project requirements are meet, in
performance appraisal consider knowledge sharing sessions
and innovation which will lead into competitive advantage of
the firm.
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