CEO leadership characteristics and international SME performance

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Thesis in Business Administration

Track: International Management

Title: CEO Leadership characteristics and International SME

performance

Coordinator: Mrs Vittoria Scalera Date: January 26th, 2018

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Statement of Originality

This document is written by student Spyridon Vasilakos who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completition of the work, not for the contents.

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Abstract

In today’s business world small companies are constantly trying to find ways to enhance performance and survive in demanding environments. Scholars believe that CEO leadership is a solution to such problems and inextricably related to firm performance. However, the existing literature has addressed the above only on a larger scale of MNEs. This paper therefore, tries to explore whether CEO leadership characteristics can have a direct positive effect on International SME performance. In order to address this shortcoming in the extant literature, four International SMEs in the shipping, retail, renewable energy, and e-commerce industry are selected for a multiple-case study. Their CEOs’ leadership characteristics are analyzed qualitatively through semi-structured interviews and their performance is measured by financial and qualitative indicators such as annual revenue streams in the last three years of operations and employee satisfaction surveys. The findings of this exploratory study suggest that there is indeed a correlation between leadership and performance, and that depending on the amount of resources, a CEO’s personality can create commitment on the part of the employees throughout the entire company. However, a common problem is discovered between the top management and their human capital. Many employees across cases do not acknowledge the existence of incentives, especially non-monetary incentives. However, they are still motivated to give their best for their companies and have faith on their leaders. Finally, more aspects should be studied in future research, as external factors were not taken into consideration for this paper.

KEYWORDS: CEO Leadership Characteristics – International SME – SME

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List of Tables

Table 1:

Overview of the chosen cases in the sample………...35

Table 2:

Overview of annual revenues in the last three years for the four cases…..40

Table 3:

Overview of the interview results conducted on the CEOs………....41

Table 4

: Overview of the results of the employee satisfaction survey………..56

Table 5:

Overview of the Propositions……….58

List of Figures

Figure 1

: Employee Satisfaction Survey Results………..41

Figure 2:

Monetary and Non-monetary Incentives Survey Results……….42

Work Count Incl. Tables and References 20551 Word Count Excl. Tables and References 17114

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1. Introduction

In the fast and ever-changing world, organizations are trying to understand and

implement what types of international strategies are needed to remain competitive and survive. The organization, in the modern day context, has become a body that is made up of its human resource and the quality that this resource base imbibes into the operational sphere of the organization. The modern day organization depends to a great extent on the contribution and quality of its human capital from top management (CEO/Leader) to the bottom of the pyramid (Chen et al 2011, Ready & Conger 2007). According to Chen et al (2011) human capital may be defined as that element of the organization’s operational sphere that is a living, breathing part of the activities that put the innate resources and factors of production into application.

It is my goal to focus on the importance of SMEs in particular, because they count for over 95% of businesses, and generate between 60% and 90% of new jobs, as long as 50% of capital around the globe, and they are responsible for more than 25% of exports in industrialized countries (OECD, 1997).

Another topic that has been widely discussed to date is Entrepreneurship (Lumpkin and Dess, 1996; Lumpkin and Dess, 2001; Baker and Sinkula, 2009). In early research, entrepreneurship was associated with great men with an innate ability to bring “new” combinations to the market (Schumpeter, 1982). Later research was mainly aimed at discovering the specific characteristics of entrepreneurial individuals such as an internal focus of control (Begley and Boyd, 1987). However, after limited success in identifying the key characteristics of entrepreneurs, the focus turned to the study of entrepreneurial behavior, orientation and processes in the organization. As

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- 8 - Gartner (1988) has argued, the focus should be on what entrepreneurs do in the organization rather than on what they are.

Many scholars and researchers believe that leadership is a core component of entrepreneurial orientation, and therefore a key to identify the answer. Irwin Federman, former president and CEO of Monolithic Memories stated, “In order to willingly accept the direction of another individual, it must feel good to do so. This is the very essence of Leadership”. In both our personal and work time we trust and follow people not for who they are, but for how they make us feel. The issue of top- level leaders and Chief Executive Officers (CEO) to have a substantive effect on the overall performance of the organization they lead is controversial and intriguing (Bass 1990, Canella & Monroe 1997, Hunt 1991). On the one hand scholars and researchers believe that CEOs’ leadership is a vital and inseparable ingredient on revitalization of organizations (Bennis & Nanus, 1985), and critically important to the top management (Katz & Kahn, 1978). That is why, leadership is the pivotal force to create vital and viable organizations, develop a new vision of what they can be in the future, and then mobilize the organization to change toward that new direction.

At this point is important to clarify that leadership and management are different concepts the former is influencing, guiding in direction (effectiveness), while the later is mastering routines (efficiency), all in all, managers are people who do things right and leaders are people who do the right thing (Bennis & Nanus, 1985).

On the other hand, some that favor external control believe that CEO leadership is inconsequential to the performance of the firm (Hannan & Freeman, 1984). The aforementioned belief is based on the fact that organizations are complex and vast, while leaders provide plain perceptual explanations. Therefore, those that favor external control believe that other variables such as environmental and political forces

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- 9 - or luck, account for the supposedly effect of leaders in organizational performance (Waldman & Yammarino, 1999).

Part of the problem is attempting to understand the potential effects of leadership at high levels of organizations and apply the existing theories on more complex phenomena to determine whether or not CEOs’ leadership is truly inextricably related to the organizational performance of International Small and Medium sized Enterprises (SMEs) influencing and driving employees to more beneficial operations, providing space for cooperation among top management, employees and customers to create overall satisfaction and efficiency.

Accordingly, my purpose is to use the charismatic and transactional leadership paradigm to show how CEO leadership can have a positive effect on entrepreneurial performance. This paradigm is crucial because prior studies in both field and laboratory settings demonstrate that followers of charismatic leaders, compared to followers of other leaders, are more committed, satisfied, and motivated; also, they receive higher performance ratings, put forth more effort, and engage in more organizational citizenship behaviors (Waldman & Yammarino, 1999).

Prior research such as Waldman et al. (2001) has focused on the 500 biggest firms around the globe. However, it is useful at this moment to explore why SMEs are important. International SMEs may be differentiated in multiple characteristics from larger companies as stated by Burns & Dehurst, 1996: personalized management, with little devolution of authority; -severe resource limitations in terms of management, manpower, and finance; -reliance on a small number of customers, and operating in limited markets; -flat, flexible structures; -high innovatory potential; -informal, dynamic strategies. Smaller firms usually lack the resources, capabilities, and market

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- 10 - power of traditional multinational enterprises (MNEs), thus needing alternative operation and approaches (Knight, 2001).

While they historically have not been associated with international business, the Organization for Economic Cooperation and Development (OECD) notes that SMEs now account for about a quarter of exports in most industrialized nations (OECD, 1997). In addition, with advances in information and communication technologies, the globalization of markets, and other facilitating trends, more SMEs are active in international markets than ever before (Bell, 1995; Craig & Douglas, 1996).

In numerous countries, such firms, by unfolding their multinational capabilities, are now the driving force for a substantial share of export and future economic prosperity (Economist, 1993; Gupta, 1989). Knight (2001) adds up, that to an extent, SMEs can be entrepreneurial engines for new technologies, product innovations, and the broader development of nations, the rise of the international SME is key trend and more and more frequent phenomenon in the international business world. Moreover, the importance of the role of entrepreneurship has been identified in Slovenia after 1990, when increased competition caused serious economic problems to some large and cost-ineffective companies that were not adapted to the market economy. Small enterprises helped to stabilize the economic situation, which once again speaks in favor of the important role small and medium-sized enterprises play in the economic development (Tajnikar, 2000).

The most dominant reason why International SMEs need to overcome several obstacles along the way is limited resources (Garengo et al, 2005; Laforet & Tann, 2006). From human capital, market share, and stakeholder relationships shortage to liquid asset shortage (Keizer et al., 2002), these constraints can interfere with SMEs true abilities to grow and are in need for more innovative approaches to succeed in the

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- 11 - international business world. The above could mean that SMEs find themselves standing idle before operational challenges, since human resource scarcity can prove to be sticky, as the expertise of employees is often bound to certain tasks (Mishima et al., 2004). However, these obstacles are not that concrete, as scholars suggest constraints affect firms’ creativity and performance in a positive manner (Bradley et al., 2011a; van Burg et al., 2012). Based on all the information above I would like to explore to what extent charismatic leadership affects the overall performance of International SMEs?

In addition to address this research question I used the Model of a Multiple Case Study. Four International Greek SMEs were studied using two different ways of collecting data. Firstly, interviews were held on the CEOs of the companies to discover potential leadership characteristics, and second, surveys were conducted to the employees to measure performance and discover the existence or absence of employee incentives. On top of the survey annual revenue streams of the last three years were analyzed as a performance measure. Moreover, diverse SMEs were used from four different industries, to provide a more complete picture of the economy. The four chosen SMEs operate in the retail, renewable energy, shipping and e-commerce sectors, thus provided different views and operational ways.

This paper may prove an important tool to practitioners and researchers around the globe, in their effort to understand the diversity that organizations provide and its multiple causes. The study will try to illustrate how Leaders in SMEs operate and try to enhance performance through employees’ incentives and leadership attributes, a topic neglected by previous studies. The sample regards Enterprises from four different industries; those are shipping, sustainable power, retail and travel agency in order to keep a broader and more complete perspective. That is because the

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- 12 - International SMEs field has been undiscovered to a large extent despite the rising significance of these organizations as stated before. In addition, I will try to investigate CEOs’ characteristics and strategies that can account for the international success of the modern, globalizing SME, particularly in light of the resource constraints that such firms typically face. To overcome such resources shortage, International SMEs may have to rely heavily on the leader to provide successful strategies for international endeavors.

Understanding the relationship between CEOs, employee incentives and SME performance is crucial for both practitioners and researchers. For practitioners especially focusing on the aforementioned matters and characteristics, effective leadership can prove to be an important tool in order to enhance current and future performance and achieve competitive advantage and sustainability. Employees can be inspired by the managers to contribute on the CEO’s strategic plan and simultaneously achieve satisfaction and have an active role on the organization as a whole. Also, employees can learn from their CEOs in order to become the leaders of the future in such organizations. With close partnership both leaders and employees can enhance their productivity and evolve on their domains of expertise.

For researchers, the study can contribute in different ways. Firstly, works like Knight (2001), Baker & Sinkula (2009) and Kantabutra & Avery (2003) can provide more complete results regarding different industries and CEO leadership characteristics. Secondly, as I mentioned before plenty of research has been done in the worlds’ biggest companies (Waldman et al., 1999; Whright et al., 2007; Van Dyck, 1996), and papers such as this could contribute on creating a more accomplished data base on different kinds of enterprises based on size and scale. Finally, as it is illustrated from the Slovenia incident, focusing and understanding SMEs can become a valuable

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- 13 - foundation to help developing and underdeveloped countries that ordinarily do not have the luxury of big investments from global players. The need for alternative angles was pointed out once again during the recent economic recession, and more attention should be pointed out in Smaller and more adaptable organizations.

The thesis is organized as follows. I provide some review on the literature regarding the importance and compositions of leadership, and the other elements of the paper, that is, employees’ incentives and International SME performance. Second, I describe the model and the process of the study. Third, some considerations are given on alternative aspects of analysis in order to help any future research attempts. Finally, I conclude by summarizing the findings of the study and the benefits of the model. It is very important to clarify all elements and relevant factors that are used on the rest of the paper.

2. Literature Review

The following chapters are compiled with a historic overview on entrepreneurial literature and the human capital. Also, key elements of the study, CEO leadership, International SME performance, and employees’ incentives are analyzed, defined and correlated. Moreover, the theoretical framework is identified, illustrated and elaborated leading to the methodology of the study. Finally, results and relevant discussion is presented in order to test the propositions, theories, and provide a cohesive conclusion and future research propositions.

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2.1 Entrepreneurship, Entrepreneurial Orientation and

Human Capital

The concept of “entrepreneur” goes back to 1755 and Cantillon (Hamilton & Harper, 1994). Cantillon defined entrepreneurs as risk takers that buy at certain prices today and sell at uncertain prices in the future. In the 19th and early 20th centuries entrepreneurs were generally considered in an economic perspective. According to Schumpeter (1994) “The function of the entrepreneur is to reform or revolutionize the pattern of production by exploiting an invention or, more generally, an untried technological possibility for producing a new commodity or producing an old one in new way, by opening up a new source of supply of materials or a new outlet for products, by reorganizing an industry and so on.” According to Lumpkin and Dess (1996), the concept of entrepreneurship is mainly related to “new entry” and it is applicable to different levels such as individuals, groups and organizations. With the development of the strategic management literature, a new concept “entrepreneurial orientation” (EO) is emerged.

Entrepreneurial Orientation is defined as an organizational willingness to find and accept new opportunities and taking responsibility to affect change (Morris et al., 1996). In the composite dimension approach, EO represents a one-dimensional construct characterized by innovativeness, risk-taking, and proactiveness. In the multidimensional approach, EO is characterized by innovativeness, autonomy, risk-taking, proactiveness, and competitive aggressiveness (Lumpkin & Dess, 1996). Many studies in the field of entrepreneurship focus on the relationship between EO and organizational performance because of the belief that firms with strong EO perform much better than those that do not adopt EO (Covin & Slevin, 1986; Hult et al., 2003). Results show a relatively consistent positive relationship with EO and

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- 15 - performance but, research mostly has focused on large enterprises (Zahra, 1996), despite the importance of SMEs for most of the world’s economies (Chen et al, 2011). Human capital according to Schultz (1960) is defined as employees’ explicit and implicit knowledge and abilities, which lead to organizational competitiveness. Further, Lynn (2000) stated that human capital is formed through employees’ skills, knowledge, and experience. Employees’ contribution, thus, requires unique and valuable knowledge, abilities, and skills (Lepak & Snell, 1999).

In general, employees’ uniqueness and value are vital to increasing firms’ competitiveness (Kang et al., 2007; Lepak & Snell, 1999) because a) the uniqueness of employees’ capabilities makes organizations distinct from their competitors, and b) competitors rarely imitate human capital because of its uniqueness (Mahoney & Kor, 2015). On the whole, employees’ value and uniqueness are the antecedents of organizational competitiveness (Lepak & Snell, 1999). Therefore entrepreneurial firms in order to apply successful strategies and survive must strongly rely on both their human capital and of course EO. Top-level management employees must follow innovative and risk-taking strategies while simultaneously inspire their peers, in order to assure better performance for the organization.

2.2 CEOs charismatic and transactional leadership

Strategic management theory has become increasingly concerned with top-level (refers to the CEO) management and their effects on strategy formulation and firm performance. For example, scholars have used a resource-based view of the firm to explain how resources, including human capital resources (e.g., top management), can be determinants of sustained competitive advantage (Barney, 1991; Castanias & Helfat, 1991). Moreover, Finkelstein (1992) pointed out how “power may emanate

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- 16 - from manager’s personality”; and more importantly, upper echelons theory suggests that specific leadership characteristics of top managers do indeed make a difference in strategy formulation and performance (Hambrick & Mason, 1984).

Before going into detail about these characteristics a definition of Leadership should be in order. According to Shamir et al (1993) Leadership is defined as a social influence process that involves the formulation and articulation of an evocative vision, provides inspiration to motivate collective action, demonstrates sensitivity to environmental trends, and displays unconventional and personal risk-taking behavior. These behaviors result in leaders being role models for followers who become committed to the leader and the vision, experience task meaningfulness, and make sacrifices for the collective cause (Shamir et al., 1993).

A consideration of personal or leadership characteristics is necessary for a more complete test of the upper echelons theory (Hambrick & Mason, 1984; Hitt & Tyler, 1991). Therefore, the two potential leadership characteristics that will be used in the study are: (1) transactional leadership and (2) charismatic leadership (Waldman, Ramirez & House, 2001). A transactional leader is one who operates within an existing system or culture (as opposed to trying to change them) by: (1) attempting to satisfy the current needs of the firm by focusing on exchanges and contingent reward behavior and (2) paying close attention to deviations, mistakes, or irregularities and taking action to make corrections (Bass, 1985). Transactional leadership on one hand is conceptually similar to the cultural maintenance form of leadership described by Trice and Beyer (1993), which act to strengthen existing structures, strategies, and culture in an organization.

Upper echelons theory (UET) is an important theoretical perspective to address the above matters. The core thesis of UET is that top executives “experiences, values, and

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- 17 - personalities affect their choices” (Hambrick, 2007) “and through these choices, organizational performance” (Hambrick & Mason, 1984). The importance of UET is evident in 2304 citations (Web of Science, 2015) of Hambrick & Mason’s (1984) seminal article that introduced the theory. In line with UET, I propose that transactional or maintenance leadership represents an active form of strategic leadership that may be an important ingredient of organizational effectiveness. That is, leaders who help to shape strategies and structures, reward subordinates' efforts and commitment, and take action to correct mistakes and deviations from expectations should help to foster better organizational performance (Tosi, 1982).

Charismatic leadership on the other hand is defined as a relationship between an individual (leader/ CEO) and one or more followers based on leader behaviors combined with favorable attributions on the part of the followers. Key behaviors on the part of the CEO are articulating a vision and sense of mission, determination, and communicating high performance expectations. While, attributional effects on followers include confidence on the leader, admiration or respect, and feeling good on the leader’s presence (House, 1977, House & Shamir, 1993, Klein & House, 1995). Furthermore, Bass (1985) viewed both of the aforementioned characteristics complementary, so that both could be displayed on the same leader. Transactional leadership helps maintain a form of employment contract with followers and provides actions to protect the status quo by making sure that deviation from expectations are corrected, thus helping to ensure expected performance levels.

However, prior findings cannot be readily generalized to the performance of higher- level executives because previous studies have mostly involved lower-level managers (Waldman et al., 2001). Transactional and charismatic leadership for the sake of the study is going to be measured using items from the Multifactor Leadership

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- 18 - Questionnaire (MLQ), which is developed by Bass and his peers (Bass, 1985; Bass & Avolio, 1990).

2.3 International SME

Internationally-active SMEs are emerging in notably large numbers throughout the world, and they tend to be more dynamic and grow faster than strictly domestic firms (Bell, 1995; Nakamura, 1992; OECD, 1997). Since the 1970s, numerous key trends have made going international a more viable option for many such enterprises.

To the extent they can be entrepreneurial sources of product and service innovation and the broader development of nations, the rise of International SMEs is a key trend. However, International SMEs on the contrary to their biggest rivals apart from the Liability of Foreignness (LOF), they also suffer from Liabilities of Smallness (LOS) which could prove an even bigger obstacle to overcome in order to enhance performance. Companies and organizations are actively seeking strategic improvements continuously, therefore their strategies based on CEOs leadership characteristics have to be aligned with performance and success of the firm.

When applied to international business, an organizational culture characterized by a cohesive common goal spawned by the CEO as a leader, is likely to engender the development and activation of key strategies such as differentiation strategies, pay attention to the customer, and adaptability that give rise to superior performance in foreign markets. The international environment entails a range of complexities related to difference in culture, political systems, and economics. CEO strategies can allow the resource-constrained smaller firms to achieve superior performance results via

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- 19 - manipulation of levels such as Research and Development, quality, distribution, and product adaptation (Knight, 2001).

Widespread usage of fax, e-mail, the Internet, and other such communications technologies is making internationalization a more viable and cost-effective option than just a few years ago (Oviatt and McDougall, 1995). Such systems are providing important competitive advantages to smaller firms, allowing them to efficiently transact business with upstream and downstream channel members throughout the world (Oviatt and McDougall, 1995). Smaller firms are also affected by the forces of globalization, including falling trade and investment barriers, and the far-reaching activities of large MNEs. Increasing cross-national competition is pressuring SMEs to internationalize. This, combined with increasing opportunities to pursue foreign markets and the ability to profit from expanded scale and scope in their operations, has created many incentives for smaller companies to internationalize (Oviatt and McDougall, 1995).

The above factors are giving rise to the emergence of a distinctive breed of entrepreneurial firm, capable of succeeding in the highly competitive environment of international trade. However, globalization, advancing information and transportation technologies, and other such trends are largely occurring in the firm’s external environment and are consequently outside of management’s control (Knight, 2001).

The need for companies to align their performance with their strategic goals is well documented in the literature (Kaplan, 1983; Eccles, 1991; Gregory, 1993). Some researchers suggested that innovation is crucial for differentiation strategy and therefore of huge importance for firm performance (Shan et al., 2014; Miller, 1983; Lumpkin &Dess, 2001). Others like Patel et al (2015) focused on the role of

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- 20 - absorptive capacity and the effects on firm performance. However, there is a need to focus on CEOs role in firm performance through their charismatic and transactional leadership in small firms.

2.4 International SME performance

But, what constitutes organizational performance? There are different dimensions of performance; that is quality, time, flexibility, finance, customer satisfaction and human resources as stated in Hudson et al. 2001. In addition, performance has some development process requirements as in point of entry, participation, procedure, and case project management (Mills et al., 1995). Project management refers to the CEO’s support (transactional part), to get everybody on board with the strategy or vision, and have clear and time limited objectives. Thus, in order to measure performance all the above information must be taken into account.

A well designed development process, with a clear focus and effective project management, would improve efficiency and increase the likelihood of success. One categorization scheme provided by Venkatraman and Ramanujam (1986) is defining and measuring business performance via financial indicators, such as, sales growth, profitability, earnings per share and so forth. Another broader scheme is measuring business performance via operational indicators that is market share, product quality, plant productivity and others. Researchers tend to consider that operational measures may be more optimal in order to measure groups or units within an organization. However in this particular case International SMEs as stated lack vast resources, market shares are relatively small so indicators that were used in Big Multinationals could show mixed results. That is why operational measures may raise some conflicts

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- 21 - between different units. Meaning that performance on some departments may influence the performance of some other departments or levels. For instance some levels may want to emphasize on quality goals while other levels may want to emphasize on quantity goals. Research and Development (R&D) department may want to acquire patents even though the facility may not be ready for those patents to be implemented. In contrast sales groups may be more interested to satisfy customer desires (Waldman & Yamarino, 1999).

Harris (1994) indicates that enterprises must show cohesion among different groups and individuals in order to simultaneously achieve divergent inter and intragroup goals. Also, this cohesion can and possibly is spawned by CEO’s leadership to subordinate levels for the ultimate International SME performance to be maximized. In the management field, Gonzalez-Benito and Gonzalez-Benito (2005), suggest the use of subjective measures because subjective measure facilitates the measurement of complex dimensions of performance.

In addition some authors found difficult to obtain objective measures in International SMEs and perceive objective measures as unreliable because the data can be narrow in scope or cannot be up to date (Pitt et al., 1996).

Nevertheless, incentives keep rising due to globalization trends, for SMEs to internationalize and CEOs are trying to seize these chances in order to create better strategies, distribution networks and adaptation to the global fashion (Oviatt and McDougall, 1995). Thus, CEOs must transcend these incentives all the way to the lower echelons of the company at the bottom of the pyramid. Only, by cohesion, collaborated efforts, understanding the common goals, SMEs can overcome the aforementioned limitations and succeed (Knight, 2001).

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- 22 - Due to the fact that this study will focus on the direct CEOs’ effect on performance, to avoid any interpretations and achieve cohesive results, two other widely used measures for SME performance by previous literature will be used; i) employee satisfaction (Van Dyck, 1996, Tompkins, 1992) and ii) sales/revenues (Hofer, 1983; Venkatraman and Ramanujam, 1986).

I believe these will be representative indicators of how different units and echelons cooperate and interrelate sufficiently under the leader’s guidance and strategic plan without potential conflicts of the results.

The essence behind every positively or negatively functional operational indicator is the human capital of an organization (Chen et al., 2011); Employee satisfaction as stated has been widely cited as an important performance indicator in various business organizations (Anderson, 1984; Barbing & Bones, 1996; Tompkins, 1992; van Dyck, 1996), as has sales (Venkatraman and Ramanujam, 1986).

Employee satisfaction variable is defined as follows: (a) employee satisfaction is the degree to which a staff member is satisfied with his/her job as measured by pay, fringe benefits, autonomy, task requirements, staff policies, interaction, professional status, guidance, co-workers, recognition, and career advancement (Slavitt et al., 1986); (b) revenues will be the only financial indicator for this paper to avoid the usage of often misleading operational indicators and it is a measure that can illustrate the growth and desirability of a company’s products or services.

2.5 Role of employees in SMEs and employee incentives

According to Staw & Sutton (1993), powerful individuals such as CEOs can influence organizational behaviors and firm directions; moreover, they can determine the kinds

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- 23 - of people who are recruited as members of their enterprises. Thus, at many occasions leaders can be responsible for the choice of people that work around them. The role of employees is of extreme importance within a firm as we stated in prior parts of the study, Chen et al (2011) highlighted that employees are those who will put effort on resources and create applications that in turn will arise as profits for the company; Lepak & Snell (1999) pointed out the uniqueness of this specific asset of the firm because the knowledge, singularity in skills, prior experience and so forth. Thus, making the employee factor one of the most difficult not only to find and hire, but also to replace. SMEs due to their often lack in financial and tangible resources can face an even bigger challenge. By definition SMEs have restricted number of employees, even finite some times by their size and in order to be sustainable and expand in international ventures the selection should be precise. Once, found the right individuals, actions from the CEO such as providing certain incentives in order to lock them in could prove useful for the firm’s competitiveness. However, incentives should be used not only to persuade employees and their intangible skills to stay in a given company, but also as means of exceeding performance. Hence, their personal attribution could lead to more fruitful results for the SME.

Employee incentives have been a matter of interest for decades to researchers. Physical assets such as bonuses, salary, company vehicles etc. is a solution to incentive problems, as assets provide the partner that makes specific investments more secure, based on studies from Hart & Moore (1990). Also, incentives such as stock option holding, exist but are more risky and associated with long-term payoffs to the leader (Wright et al., 2007). More recent work of Castanias & Helfat (2001) argues that even without the existence of physical assets, an employee can still find the incentives to invest on a specific project or strategic plan, making him/her

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- 24 - indispensable within the organization. To be more exact and shed some light on the situation, employees need not only self-motivation, but also motivation from their leader. This type of motivation can be found throughout the organization from promotions to acknowledgments from the top management and so forth.

To conclude we discussed how the leader (CEO) of a given SME can be responsible for the enhancement of the firm’s performance and also the active role that employees have on any endeavor. As I would like to study the moderating effect of employee incentives on the aforementioned relationship, it is optimal to understand by this case study if the existence of incentives will affect performance and how; incentives could have the ability to balance the leader – performance relationship, if the company’s CEO does not have some charismatic leadership characteristics.

To sum up the world is sifting day by day to uncharted waters and SMEs is one of the biggest parts of the entrepreneurial world which has been neglected by scholars in previous years. Small organizations however face uncertainties and obstacles due to their tangible and intangible resource scarcity in every step they take, especially in the international terrain. At these moments CEOs should take initiatives, provide vision and strategies to their employees in order to overcome difficulties and rise to the occasion. The majority of the developing economies and almost all underdeveloped countries rely almost solely on international SMEs to expand and thrive; therefore such a crucial part of the global economy deserves some further studies. Thus I came up with the following Research Questions:

RQ1: To what extent CEOs charismatic and transactional leadership influence International SMEs performance?

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RQ2: To what extent the CEOs effect of charismatic and transactional leadership characteristics on International SME performance is moderated by the existence and/or abundance of employee incentives?

3. Theoretical Framework

In the upcoming chapter, the research philosophy is described. First, an elaboration on the research components and how are used to create propositions from theory are presented. This is followed by a justification of how these components could work in a tandem. Afterwards, the moderator effects, on Leadership characteristics are described and propositions derive from their relationship.

3.1 Transactional Leadership

Pawar and Eastman (1997) proposed that one possible form of strategic leadership is transactional. As I discussed in previous parts of the paper, a transactional leader is one who operates within the existing system on the organization and does not try to change it fundamentally; one that corrects mistakes, and try to strengthen structures and culture in the organization (Trice & Beyer, 1993). That can be achieved by facing all of his employees as equals and collectively, not as individuals. Also, paying attention to rewards and bonuses so that to be fairly and equally distributed. Listening to costumers’ complaints or comments and making corrections towards a better consumer experience, correcting delays in distribution channels and making production mechanisms more efficient and aligned with the staff’s capabilities;

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- 26 - By so doing, a transactional leader manages the mundane, day-to-day events that comprise the agendas of many leaders. Recent meta-analytic evidence provides overall support for the performance-stimulating potential of transactional leadership (Lowe et al., 1996). Therefore, based on the UET transactional leadership can be a key component of organizational effectiveness. However, prior findings cannot be readily generalized to the performance of higher-level executives because previous studies have mostly involved lower-level managers in top firms. The qualitative nature of effective leadership may be substantially different at higher and lower management levels (Day & Lord, 1988; Katz & Kahn, 1978). In addition, performance has often been assessed with ratings or other subjective procedures, rather than with objective measures. Taken as a whole, however, the above theoretical arguments and prior research may suggest that:

Proposition 1: Transactional leadership of CEOs will ultimately be correlated with

better organizational performance on International SMEs.

3.2 Charismatic Leadership

Charisma represents another potential key component of organizational performance and strategic leadership (Pawar & Eastman, 1997). I defined charismatic leadership based on works from House, 1977; House & Shamir, 1993; and Klein & House, 1995 as a relationship between the CEO and one or more followers with favorable attributions on the part of the followers. However, it is difficult to define charisma without considering some of the consequences resulting from the charismatic relationship. Employees realize that CEO’s vision pertains and a high level of collective cohesion is developed (Waldman et al., 2001). Staff experiences a

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- 27 - heightened sense of self-efficacy as a result of their cohesion and the CEO's expressions of confidence in their ability to attain the vision (Podsakoff et al., 1990). Moreover, a charismatic leader may show persistence and enthusiasm in pursuing goals over the long haul and be demanding of others through the communication of high performance expectations (Kanter, 1983).

The meta-analytic work of Lowe and colleagues (1996) provides even stronger support for the performance- stimulating potential of charisma, as compared to transactional leadership. Nevertheless, these findings cannot be readily generalized to the performance of CEOs of SMEs because not many previous studies has focused on Small Multinationals, and especially the fact that most prior research has focused on lower levels of management. However, theoretical support for the importance of charismatic leadership at the top executive level can be found in the literature (Day & Lord, 1988; Hambrick & Finkelstein, 1987; Katz & Kahn, 1978). In sum, despite the theoretical work available, the literature would benefit from systematic empirical study involving CEOs. Therefore, similarly to the transactional leadership previous literature may suggest that:

Proposition 2: Charismatic leadership of CEOs will ultimately be correlated with

better organizational performance on International SMEs.

3.3 The joint effect of Transactional and Charismatic

Leadership

After arguing that both transactional and charismatic characteristics maybe important aspects of leadership at the strategic level and based on the study of Bass, (1985) that believes these two aspects can be complementary it is time to connect these two forms

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- 28 - and see how they work in tandem with regard to organizational performance. Similar to Bass (1985) and Trice & Beyer (1993) acknowledged that both of the characteristics could be shown to the same leader. Empirically, research has generally shown relationships between charismatic and transactional leadership, especially when the latter is measured in terms of contingent reward behavior (Bycio et al., 1995). Without the constant availability of adequate resources to offer to the employees as incentives, a manager sometimes may have the need to motivate his employees by unveiling or exploiting his charismatic leadership characteristics. At the same time, a case can be made that charismatic leadership adds to the effect of transactional leadership on outcomes such as performance. Transactional leadership helps maintain a form of employment contract with followers and provides actions to protect normativity by making sure that any deviations from expectations are corrected, thus helping to ensure expected performance levels (Waldman et al. 2001). Therefore, transactional leadership is making sure than the existing business model works efficiently enough in order to reach company short-term expectations such as in sales. However, as Podsakoff and colleagues (1990) argued, the trust, respect, vision, and high performance expectations engendered by the charismatic leadership motivate followers to put forth effort beyond expectations and to accept organizational change. The result should be heightened commitment to achieving performance beyond expectations. That means employees of charismatic leaders are willing to surpass their comfort zone in the business environment, put forth more effort and be tenacious to achieve a greater goal and vision for the company, thus achieving even higher performance levels than before.

To conclude, the above do not mean that one characteristic should exist in the expense of the other. There are ways that a Leader can use both of the characteristics

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- 29 - simultaneously depending on his strategy, quantity or availability of resources and even retaining some of these resources for the future. For example, if in given company there is a limited amount of liquid assets in order to give bonuses, the CEO could withhold the money from his employees to avoid any injustice; while on the same time invest the same amount to improve the working environment. That action could spawn feelings of trustworthiness or respect and a tendency to follow the leader’s strategies for a better organizational performance.

Consequently based on the above and theoretical background I conclude to the following:

Proposition 3: Combined transactional and charismatic characteristics of CEOs will

ultimately be correlated with better organizational performance on International SMEs.

3.4 The moderating effect of employee incentives

It has been discussed so far that SMEs consist a unique and emerging domain in the business world (Knight, 2001). However, I pointed out that by definition their small size provides both advantages and major disadvantages simultaneously. On one hand, SMEs can be more adaptable in international ventures and different situations than larger MNEs and can create a more stable economy like in Slovenia (Tajnikar, 2001), and on the other hand often they lack resources. Those resources could be from human capital to equipment or even liquid assets. Logically, the above limitations can incommode the CEO’s goal or international endeavor due to physical asset scarcity. Therefore, Hart & Moore’s (1990) solution to motivate employees using company vehicles, bonuses and other physical assets can be a severe impediment for the leader.

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- 30 - It was pointed out in the literature review that performance goals between different units across the same company can be divergent. For instance, production may want to emphasize smooth manufacturing cycles with little time spend redoing set up and layout schemes, whereas sales groups may want quick response and unplanned orders (Waldman & Yammarino, 1999). A transactional leader by definition would try to address each of those different departments needs therefore leading to the potential accomplishment of respective operational performance goals, although organizational performance at the higher level of analysis would not get maximized.

It is the obligation of the charismatic leader to take over at this point and drive the enterprise to desirable results. At this point I can argue that a CEO with charismatic leadership characteristics can overcome such barriers and find ways to make his/hers employees to follow his specific strategic plan for the organization. Based on his communication skills to articulate a vision, create a feeling of obligation and responsibility to the firm, and generate strong admiration and respect to his presence will ultimately transform his relationship to the employees from CEO – subordinates to Leader – followers.

Harris (1994) has noted that an important influence on linkages is likely to be seen in the nature of the relationships that exist among individuals and among work units. As shown previously, cohesive intragroup and intergroup relationships are likely to be spawned by CEO charismatic leadership and the cascading leadership that results from role modeling processes, which, in turn, encourages the cooperative pursuit of goals. In short, intergroup cohesion makes it possible to achieve simultaneously the possibly incongruent goals of organizational units in such a manner that the ultimate performance of the organization has the potential to be maximized. For example, under cohesive conditions, a design unit will work closely with manufacturing and

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- 31 - marketing units to produce a product design that represents cutting- edge technology, does not have to be repeatedly redesigned to become manufacturable, and is desired by customers (Waldman & Yammarino, 1999).

In the absence of major financial or other incentives, a charismatic leader should try to create cohesion within the groups, in order for them to realize that with synergy or coordination across all business units is the only way to reach high levels of entrepreneurial performance in a way that one group’s performance goals is not accomplished in the expense of or without concern of another (Katz & Kahn, 1978; Tosi, 1992). However, in the presence of adequate resources a leader the same CEO taking advantage the transactional leadership characteristics could use these sources to motivate employees, address their demands or needs and ultimately lead them to better performance goals (Trice & Beyer, 1993)

Taking into account that both transactional and charismatic leadership characteristics can be complementary, the presence or not of resources and therefore incentives will drive the CEO to the optimal strategy to follow; by either exploiting the one or the other aspect in order to enhance operational performance.

Consequently based on all the above information and theoretical background I conclude to the following:

Proposition 4: If employee incentives within the firm are perceived as uncertain or

absent CEOs charismatic leadership will be correlated with better organizational performance on International SMEs..

Proposition 5: If employee incentives within the firm are perceived as certain or

abundant CEOs transactional leadership will be correlated with better organizational performance on International SMEs..

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4. Research Methodology

4.1 Research Design

This research explores the topic of CEOs with charismatic and transactional leadership characteristics and aims at discovering and understanding if CEOs with those attributes can have a positive effect on International SME performance. This concept is moderated by employee incentives so that the existence or absence of incentives will enforce one of the two characteristics on the part of CEOs or even both up to a certain extent.

To study the above relationships I intend to use the model of a Multiple Case Study. That is because I would like to follow the strategy of theory testing from cases in a qualitative research. A case study can create theoretical constructs and propositions from empirical evidence. Each case will work as an individual experiment that stands on its own as an analytic unit. A multiple case study can create more robust theory and propositions are more deeply grounded in varied empirical data. Brown & Eisenhardt (1997) in their multiple case study found that some firms use alliances to experiment with the future, whilst other firms use exploratory products. That result illustrates the level of abstraction and the analytic power that exists in such studies. For this multi case study I collected my data through semi-structured interviews and a small employee survey. The interviews were used in order to understand and explore the business philosophy of the CEOs in each company, explore the ways in which they choose to motivate their employees and their overall relationships with them. Based on these topics their leadership style and characteristics was determined and analyzed. Regarding the employee survey it was important to explore whether employees share their managers’ vision, if the motivation strategies are effective and

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- 33 - their willingness to participate in collaborative company efforts. However, because of the big number of employees and the inability to conduct multiple interviews and to create a more representative sample on their behalf, the survey was chosen as a research method.

On top of the employee satisfaction survey annual revenues of the companies in a span of the last three years are going to be used as a financial indicator according to Venkatraman and Ramanujam (1986) to measure performance. SMEs with international endeavors are going to be studied in two stages using primary data from current business operations and strategies. The number of cases selected is four and each company operates on a different business sector (namely: X, Y, L, Z). The reason behind the industrial diversity of the sample is because the resource availability or scarcity and style of management is different and could cover the previously discussed research questions and parameters to a sufficient degree. In my opinion it is a feasible study, because prior papers had focused on similar issues on MNEs or different leadership characteristics on both Big and Small organizations (Waldman et al., 2001) and showed positive results. The number of SMEs is vast and data can be collected from multiple sources. Also avoiding sources of information such as market share and profits per share, and focusing on relationships and communications within the organization will ultimately give results that I can argue upon. The Research Question will study the strategies and plans of CEOs in their international efforts, how they cope with their employees and resource shortage to succeed in the demanding international environment and create better performance.

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4.2 Case Selection

All four SMEs are founded and located in Greece. This chosen country can be a suitable example of how organizations are trying to adapt in the demanding international environment and which strategies or connections they use. That is because Greek market has not yet fully recovered by the recent worldwide economic breakdown of 2007. Moreover, the organizational sample that will be used derives from various industries such as retail, e-commerce travel agency, and shipping industry. The industrial variety in cases may produce different perspectives and strategies, as some companies focus on creating and distributing products while other offer qualitative services. Also, different industries will rise the opportunity to study Leaders with alternative characteristics, as they cope with different obstacles and objectives. Finally, this broad perspective may also give some complementary results among these industries, so that the paper is interesting and can provide some basis and support on the propositions for future research.

The first company (A) is located in Athens, Greece and founded in 2007; it is an e-commerce firm that specializes on online traveling. It is one of the top ten online travel agencies in the world in selling flying tickets and one of the most successful start-up ventures in Greece. It operates in more than 40 languages serving 1500000 customers every year all around the world. This company is more like a global start up, where 98% of their revenues come from foreign markets, thus international activities with other agencies, hotels, airlines and ports are important on a daily basis. It has 120 employees providing different services and it is awarded for quality management and supervision by the owner by international organizations. It will be interesting to see what are the tools used by the Leader in order to enhance company

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- 35 - performance as well as how and in which ways he supervises his employees as international awards were granted to the firm.

The second company (X) has its’ headquarters in Chios, Greece the only and exclusive place is the world that produces masticha, a unique kind of gum. It was founded in 2002 and expanded its headquarters in Athens, Greece several years later. Using this as a basic component apart from gum the company produces pharmaceutical products, snacks, chocolates, beverages and cosmetics. Currently 55 employees work at this company with various expertises from managers, chemists, to engineers. It has successfully launched international endeavors in Israel, France, Cyprous, New York, Dubai and other Middle East countries but faced major challenges going to the United States because of unfamiliarity of the product and marketing strategies. The company constantly tries to expand and explore new opportunities for international endeavors.

The third company (Y) is a shipping corporation from Athens established in 1966 which provides technical and commercial shipmanagement services in the deep-sea maritime sector. In over four decades the company has managed to become a world leader in the maritime field providing high transportation standards for its customers.Company Y is involved in the dry bulk, reefer, tanker and container sectors and has several contracts with ports and shipping associations, while currently has at its manpower around 100 employees. Since it specializes in the deep-sea segment transportations of goods are of worldwide caliber from China to the United States and vice versa.

Finally, the last SME, company Z in the chosen sample is concerned with renewable energy sources, from wind farms to solar panels trying to create sustainable and green energy platforms in various regions in Greece and the Balkan in general. It is the first

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- 36 - Greek firm that specialized in renewable sources of energy sice 1982. Moreover, it is a partly government and partly private owned corporation with 70 employees at its human capital 20 wind farms, 17 hydroelectric parks, and 28 solar parks. Its’ human capital is consisted mostly of engineer experts that specialize in renewable resources and sustainable business models. With collaborations in the Balkans (FYROM/Bulgaria) has created several of the business projects that are mentioned above, and the firm’s future endeavors are focused on expanding its operations and parterships with more countries in Southern Europe.

Company overall information are presented in the following table:

Table 1

: Overview of the chosen cases in the sample

Company Size/ Employees Date and Place that Launched operations Industry International Operations

A

120

2007 in Athens, Greece ecommerce/

travel agency Worldwide

X

55

2002 in Chios island, Greece Retail and Wholesale products Europe/ Middle East and New York

Y

100

1966 in Piraeus, Greece Shipping Worldwide

Z

70

1982 in Athens, Greece Renewable Energy Resources Balkans/ Southern Europe

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4.3 Case stage analysis

On this section all stages of the research design as well as the participant are described and analyzed for each specific case.

4.3.1 CEO Interviews

The first stage consists of exploratory semi structured interviews with the CEOs of the companies with the help of some questions on individual and firm level of analysis, to discover unexpected relationships and qualitative information regarding CEO Leadership characteristics and their relationship with their employees. This choice is based on the fact that such method ensures a systematic handling of the different participant’s answers and allows fluidity and flexibility (Patton, 2002). Questions will be constructed using components of the Multifactor Leadership Questionnaire (MLQ) (Bass, 1985; Bass & Avolio, 1990) and theories regarding CEO Leadership characteristics (Waldman et al., 2001) and employee satisfaction (Van Dyck, 1996; Tompkins, 1992).

The original interview structure was consisted of 15 open questions and the interviews as a hole lasted from 30 to 60 minutes. However, when interesting opportunities arose at the moment additional or follow up questions were used in order to explore further CEO characteristics and aspects. The interviews were audio-recorded and transcribed. Also, notes were taken during the meetings with the CEOs to capture potential key points. By participants’ desire, the interviews and information about the companies are held under anonymity and the collected data are used for academic purposes solely; and only after granted their permission to do so.

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- 38 - The first 3 questions were regarding the reasons why the CEO chose this particular industry and his motivation on going to his working environment day after day. The next 7 questions were trying to explore his strategic style and leadership characteristics based on questions regarding his relationship with his employees, how he deals with internal conflicts, the level of trust on senior management, the level of autonomy that he grants and how he chooses to motivate his subordiantes. Finally, the last 5 questions were focusing on what kind of incentives does the CEO offer, how often, and in what state (monetary, non-monetary) in order to gather data on the moderating variable for this paper.

Interviews were held only to the CEOs because according to Eisenhardt & Graebner (2007) some individuals may give biased answers under face to face duress, therefore the first stage of the study should focus on highly knowledgeable informants who view the phenomenon from diverse perspectives, and for the sake of the paper I assumed that on an SME the most knowledgeable and unbiased individual is the CEO.

4.3.2 Employee Satisfaction Survey

The second stage of the case study was consisted of online questionnaire given to a representative sample of the employees depending on the SME size. Employees from different departments were used such as sales, human resources and senior management to try and keep a broad perspective on different levels and responsibilities. Respondence rate for each company was around 15% of the total ammount of the employees.

The online survey for the employees was consisted of 30 close-end questions using a matrix with scales from Strongly Disagree to Strongly Agree measuring overall

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- 39 - satisfaction. It was distributed via personnal emails to the employees of the companies provided by the CEOs’ secretaries. The first 11 questions were regarding of how the company assists and what kind of tools provide to the employees during day to day operations. The next part of questions was related on the kinds of positive experiences the employees have on their current company, again with the help of the same matrix. Moreover, some questions regarding which kinds of incentives that the company provides and how it tries to motivate its’ staff. Finally, a self-evaluation matrix was provided, where each employee should compare himself with an average worker in his position in the specific company along with general overview questions measuring satisfaction and opportunities to grow within each particular organization.

This survey was aiming to explore the CEO-Employees relationship from the side of the subordinates and simultaneously collect data for the rest elements of the paper the employee incentives and SME performance measured by employee satisfaction and annual company revenues. Different kinds of employee incentives was measured both from the interviews and the survey; monetary incentives such as bonuses and tool upgrades and physical assets, and non-monetary incentives such as sense of participation on a greater goal and promotions as well as monitoring incentives. Moreover, due to the small size of the multinational firms and possibly small market share, performance was measured using employee satisfaction and total revenues within a span of the last three years based on works from Van Dyck, 1996; Tompkins, 1992 and Sitzia & Wood, 1997 that used the same measures. Depending on the growth of revenues gradually I could make an argument that customers are feeling comfortable and satisfied by the selected firm. The revenue numbers depending on the positive or negative direction could confirm or negate the effectiveness of strategic plans on the part of CEOs towards the future endeavors of a given SME.

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- 40 - In addition to the semi-structured interviews, the survey and the company statements to find out total saleswere used to increase validity and credibility for this paper. So that, some kind of triangulation method reduces the risk of biases and unreliability.

5. Results Section

This chapter presents the findings obtained from the interviews that I conducted with the four different CEOs of the respected companies that are analyzed in the above section. As well as the results and findings gathered from the survey that was given to employees of the companies. First, the within-case results are illustrated for each company. Second, the similarities and differences across SMEs are discussed in the across-case results section.

5.1 Within-Case Results

In the following section an overview of the annual revenue streams of all the four cases in the sample in the last three years is presented. This financial indicator is used as a way to measure performance along with employee satisfaction and study the International SMEs’ operational effectiveness.

As it can be observed from the Table 2, in general from 2014 to 2016 all four companies have an upward trend in their revenues. Thus, it can be perceived that companies’ operations are efficient enough and gradually grow.

More specifically, Company A is the fastest growing SME of the sample as the revenues show an 80% increase in revenues from 2014 to 2016. Company X shows almost identical revenues streams from 2014 to 2015 with just a 2% increase in 2016. Moreover, Company Y presents a 20% increase between 2014 and 2016, while sales in the last two years are again similar around 15 million Euros. Finally, Company Z

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- 41 - has a 23% rise in revenues in the last years with an equally distributed increase of 11% each year of operations.

Even though all the companies reveal positive revenue flows based on the financial measurement, there are clear differencies among them regarding the volume of growth. In the following chapters, it will be discussed whether these differencies are because of Leadership characteristics of the CEOs of the studied companies, or maybe are because of external or other factors that were not taken into consideration for this paper.

Table 2

: Overview of annual revenues in the last three years for the four cases

Sales/Revenues in millions of Euros

Company 2014 2015 2016

A

16,1 25 29

X

9,8 9,7 10

Y

12,7 15,1 15,3