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Why Do SMEs Need Transactional Leadership Style

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There is a plethora of leadership theories and models that attempt to consider leadership as an enabler of firm performance. There is an increased emphasis on the important role of leaders when interacting with followers and stakeholders. Transactional leadership involves determining the tasks, rewarding goal achievement, and punishing failure in attaining goals. Transactional leadership style is a new performance paradigm evident in SMEs today. Understanding this dimension from a transactional leadership and performance paradigm may provide a significant realization bridging this important field of leadership and management.

Transactional leadership is successful in developing mutual exchange between leaders and employees in SMEs. This leadership form actually assumes impersonal interactions in a reality where leaders do not consider higher humanistic desires or relationships between leaders and followers.

This form of leadership is still based on the grounded theory that does not explore a desired probable situation. While it has its limitations it is still widely used in SMEs. This leadership style is so popular among practicing managers today. Transactional leadership is linked with organizational effectiveness, particularly in terms of achieving goals.

Another aspect of the transactional leadership style is that managers using this style are passive by exception or laissez-faire when applying leadership. Laissez-faire is characterized by managing the situation where a problem has occurred, and leaders take a reactive approach to correct mistakes or to overcome problems. Transactional leaders do advocate for knowledge sharing and joint problem solving with subordinates. Laissez-faire leaders do not possess a high commitment to seeking the proposed solutions jointly with their subordinates. When such leaders assume the responsibility or intervention to solve problems, they rarely consider the empowerment of their employees to assist in problem-solving and goal setting. To overcome this obstacle, leaders today should empower followers to engage in problem-solving.

Therefore, transactional leadership can be used to review tasks and goals, and requirements of subordinates. Leaders would begin using transactional leadership to set goals and determine tasks and then, when time allows, move toward more transformational leadership and place more emphasis more empowered to engage followers. This supports this approach for leadership to generated two sides of an X and Y-axis.

On one side is the concept of leadership that creates change through taking a process-oriented (transformational leadership) and the other as more of a relationship-oriented approach (transactional leadership).

Thus, transactional leadership does affect organizational performance through achieving business goals. Transformational leadership provides a frank appellation of the importance when beginning a leader-follower relationship, downsizing, upsizing, onboarding, and making significant changes to the structure and organizational improvements but leaders must be aware of its limitations. Just as leaders need to be both autocratic and democratic at times they also need to be both transactional and transformational at times also. Knowing both styles and when is best to use them is an important concern here and will defunct the myth of transactional leadership as being an adequate style of leading in and of itself.


Mostafa Sayyadi, CAHRI, AFAIM, CPMgr, works with senior business leaders to effectively develop innovation in companies and helps companies—from start-ups to the Fortune 100—succeed by improving the effectiveness of their leaders. He is a business book author and a long-time contributor to HR.com and Consulting Magazine and his work has been featured in these top-flight business publications.

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