CEO Transformational Leadership, Supply Chain Agility and Firm Performance: A TISM Modeling among SMEs

Competition due to globalization has made businesses improve their internal processes and concentrate on their SC. SCM is defined as controlling an organization's external and internal activities, including procurement, logistics, manufacturing, and distribution, involved in delivering products and services (Chen & Paulraj, 2004; Pagell, 2004; Prajogo et al., 2008). Suppliers play a vital role in building competitive capabilities and delivering value to the final customer. With 70% of manufacturing activities being outsourced (Ates & Bititci, 2011), the SC activities significantly impact the firm performance. There are many aspects of SCM that affect the firm’s performance, like integration, collaboration, and agility (Cao & Zhang, 2011; Eckstein et al., 2015; Huo et al., 2014; Pradabwong et al., 2017; Simatupang & Sridharan, 2008; Sundram et al., 2011; Wiengarten & Longoni, 2015; Zhang et al., 2016). However, considering the current dynamic and turbulent business environment, SCA plays a significant role in meeting customer requirements quickly (Tse et al., 2016).

SCA is the flexibility to absorb short-term changes in the business environment (Lee, 2004). Braunscheidel and Suresh (2009) elucidate SCA as “the capability of the firm, both internally and externally, in conjunction with its key suppliers and customers, to adapt and respond quickly to marketplace changes as well as to potential and actual disruptions.” Li et al. (2008) define an organization’s SCA as the result of integrating the SC’s alertness to changes (opportunities/challenges)-both internal and environmental—with the SC’s capability to use resources in responding (proactively/reactively) to such changes, all in a timely and flexible manner. The above definition of SCA embodies two key components—alertness to changes and response capability. The alertness component highlights agility as an opportunity-seeking capability from internal and external vantage points. In contrast, the response capability component emphasizes agility in change enabling capabilities embedded in organizational processes. Furthermore, Li et al. (2008) characterize SCA into the following dimensions, namely—‘strategic alertness’ (the capacity of the firm to detect changes in its business environment like competitor moves, etc.), ‘strategic response capability’ (The company's ability to incorporate a flexible supply chain to meet the needs of changing market dynamics), ‘operational alertness’ (the firm's ability to notice changes in its current demand and supply sources) and ‘operational response capability’ (ability to respond to changes in demand and supply promptly) (Dove, 2005; Holsapple & Jones, 2005).

Further, extant literature has always posited a positive relation between SCA and firm performance. Scholars widely acknowledge that practices like integrating members of the SC, sharing real-time information, good relations with suppliers and customers, and cellular manufacturing would increase visibility, thereby making the SC agile (Dubey et al., 2018; Eckstein et al., 2015; Tse et al., 2016; Um, 2017). In addition, they highlighted that top management support and commitment are extremely necessary for these activities. The agility thus developed would help firms absorb market fluctuations, enhancing their performance. Hence, it can be noted that to survive in today’s dynamic business environment, firms need to be agile not only internally but also along the SC. In addition, top management teams and transformational leaders play an important role in inducing agility in operations (Mesu et al., 2013; Nadkarni & Herrmann, 2010).

Top management leadership is crucial for the success of any organizational activity. As they are idiosyncratic, it is not easy to imitate, and they often create a competitive advantage for the firms. Hambrick and Mason (1984) postulated in their upper-echelon theory that strategic choices and organizational outcomes could be predicted by managerial background and characteristics as organizations reflect their top managers. It is empirically recorded that features like age, tenure, educational background, flexibility, and locus of control of top management teams have a significant influence on the innovativeness and performance of the firm (Bantel & Jackson, 1989; Finkelstein & Hambrick, 1990; Miller & Toulouse, 1986). Further, Miller (1983) suggested that managerial effects are more intense in smaller firms as they are less constrained by organizational inertia. Weiner and Mahoney (1981) view leaders/chief executives as decision-makers who consciously choose among diverse courses of action and determine the fates of their organization.

Johns and Moser (2001) define leadership as an act of influence, a process, and a person’s trait qualities. Scholars have proposed many leadership theories, namely autocratic leadership, democratic leadership, laissez-faire, transformational and transactional leadership. However, Bass et al. (2003) suggest that TL is more effective in achieving higher firm performance considering the current dynamic and turbulent business environment. Transformational leaders motivate their subordinates to go beyond their regular course of work by nurturing a climate of trust and persuading them to prioritize organizational objectives over self-interest (Bass, 1985). Transformational leaders are competent in visualizing success and inspire subordinates to attain their objectives (Keller, 2006). They demonstrate faith in their subordinates' abilities to achieve goals and encourage subordinate coordination and cooperation to obtain superior results (Wang et al., 2011). Bass and Avolio (1994) have identified the following characteristics of transformational leaders: "inspirational motivation" (e.g., aiming to increase awareness and enthusiasm for their goal), "intellectual stimulation" (e.g., inspiring followers to think outside the box), and "individual consideration" (e.g., treating each person differently and helping them to develop their potential).

Furthermore, scholars have explored the influence transformational leaders have on their subordinates in various contexts like hotels, military research and development organization, manufacturing and service organizations and concluded that TL always leads to positive firm performance (Chen et al., 2015; Patiar & Wang, 2016; Raed et al., 2016; Srinivas & Waheed, 2015). They argued that transformational leaders increase firm performance by improving subordinate relations and enhancing individuals' psychological attachment to the team. These evidences help us conclude that leaders play an essential role in all organizational activities, and TL is best suited to enhance firm performance.

Firm performance is the process of quantifying the efficiency and effectiveness of the firm (Neely et al., 1995). Effectiveness is the extent to which a customer’s requirements are met, while efficiency measures how economically a firm’s resources are utilized to meet the customer’s needs. Performance evaluation, according to Kaplan and Norton (1995), is multi-faceted and includes both monetary and non-monetary metrics. A manager’s ability to generate good revenue, effectively use resources, and achieve target profits is measured by the financial dimension (Patiar et al., 2012; Sainaghi, 2010). Johnson and Kaplan (1991) and Sainaghi (2010) criticize for merely using financial measures as they are short-term and market-oriented, and suggest that non-financial measures like monitoring business process, customer and employee satisfaction, schedule attainment, and competitive performance, to name a few to be used along with financial measures while measuring a firm’s performance.

The study constructs have been operationalized based on the literature review presented above, as shown in Table 1.

The literature review presented above has provided empirical evidence of the significant impact of TL and SCA on firm performance (Chen et al., 2015; Eckstein et al., 2015; Patiar & Wang, 2016; Tse et al., 2016) separately in different contexts. However, effective integration of TL to achieve SCA and lead to enhanced firm performance requires developing a framework that demonstrates the linkages among the study constructs. For example, quantifying and measuring the impact of schedule attainment and customer satisfaction on firm performance is insufficient. There is a strong relation between schedule attainment and customer satisfaction as there is a clear association between the rate and amount of schedule attainment and customer satisfaction. Therefore, to effectively implement the constructs, one needs to develop an insight into the association between the constructs. The isolated knowledge about the constructs might help delineate the impact on performance but will not contribute to implementing the same. Thus, the mere identification of the constructs of TL and SCA is incomplete support to the manager charged with implementation.

Identifying the study constructs and their connections reveals its strengths and limitations. This, if equated against the business rivals, can propose improvement prospects for firms and measures to overcome threats. As the accomplishment of one construct may lead to the attainment of another, it is always recommended to overlook the isolated measures and consider this holistic view. Thus, identifying the relative importance and the structural relationship among the constructs would enable effective management and implementation. For example, Sharma and Bhat (2014) developed a conceptual model of SCA showing the linkages between the enablers. They further classified the enablers into four categories by creating the driver-dependence diagram and suggesting that the enablers managers must focus on implementing an agile SC. Understanding the associations between the variables can demonstrate practical implications of academic concepts in real-world situations by taking feedback from professionals. Thus, the TISM modeling will enable academicians and practitioners to get a deeper understanding of the phenomenon, thereby assisting in implementing the same.

While the extant literature has progressed well in identifying the drivers of firm performance in the domain of TL and SCA, the classification of these measures based on their relative importance to managers is lacking. Furthermore, there is little research that highlights the constructs' driver-dependence link, which can assist managers in managing the interactions that exist between them. After a thorough literature review and consultation with experts, the following research questions have been adopted for the study:

To answer the above research questions, the following objective has been formulated:

Manufacturing SMEs in India was selected as the context of the research. They account for roughly 80% of India's industrial population, contributing to about 35% of gross industrial production and 40% of total exports in the manufacturing sector. They also employ many people across the country as they operate from semi-urban and rural areas. Hence, they are called the backbone of the Indian economy (SME Chamber of India, 2020). Global trends in classifying Micro, Small, and Medium Enterprises (MSMEs) reveal that classification varies significantly among jurisdictions and depends on the country's government regulations. Though a comparison of certain nations found that most of them use the number of employees to describe MSMEs, MSMEs in India are now defined based on the investment in plant and machinery/equipment. To promote ease of doing business, the government has implemented new turnover-based criteria for micro, small, and medium companies that will be beneficial to MSMEs beginning July 1, 2020.

Furthermore, issues such as resource scarcity, financial constraints, management and employee attitudes, and a lack of skill and expertise have made Indian SMEs record relatively slow progress toward global market challenges, new technology adoption, and gaining a competitive advantage through the adoption of modern operations strategies (Majumdar & Manohar, 2016). It is also noted that SMEs encounter difficulties managing their SC successfully. SMEs have an organizational structure primarily based on ownership. Few partners' or owners' attitudes and visions play critical roles in governance, strategic decision-making, and corporate growth (Thanki & Thakkar, 2019). Hence, it would be interesting to explore how the TL of the CEO would enable SCA among SMEs, thereby impacting firm performance (Table 2).

After operationalizing the study constructs, a pair-wise comparison was facilitated by interviewing production managers at twelve manufacturing SMEs. SMEs make up 95 percent of India’s total industrial units. The average experience of the interviewees was seven years in the production and SC domain. The profile of respondents and the firm considered for the study are shown in Table 3. Each interview lasted for a minimum of two hours, and the aggregated matrix is developed by summating the number of ‘Yes’ responses for the pair-wise comparison. The aggregated matrix is shown in Table 4. The reachability matrix is generated from the aggregated matrix if two-thirds of the experts have confirmed the relation between the pairs. Therefore, if two-thirds of the experts have established the relationship, we code such a pair as 1 in the reachability matrix; otherwise, it is codified as 0. The reachability matrix is then checked for transitivity, and the final reachability matrix is developed, as shown in Table 5. The procedure involved in developing the aggregated matrix, reachability matrix, development, and checking the correctness of the TISM model thus developed is outlined in Sushil (2018).

The final reachability matrix is used to identify each factor's reachability set and antecedent set (Warfield, 1974). The reachability set consists of the factor itself and the other factors it may impact. In contrast, the antecedent set consists of the element itself and the different elements that will affect it. Finally, the intersection set is derived as the common factor in reachability and antecedent.

The top level of the TISM hierarchy comprises enablers with the same reachability and intersection set. Once the top-level element is identified (Table 6), it is separated from the other components, and the procedure is repeated to identify the element at the next level. This procedure is repeated until all the enablers present in the study are placed in the hierarchy (Table 7). The TISM digraph is developed from these level partitions (Fig. 1).

Further, the t-test discloses a higher mean score for the linkages (Table 8), and most of the associations have a p-value lesser than 0.05, making these relationships statistically significant. The higher mean values signify the importance of the TL of the CEO in establishing an agile SC among SMEs and attaining enhanced firm performance through the delivery schedule and customer satisfaction.

The performance factors are the financial and non-financial outputs of the strategic plan. As described by Kaplan and Norton (1995) in Balanced Score Card (BSC) and as observed from the developed TISM model, these factors are “lag factors” and get impacted by “lead factors.” While the essential economic measures are the return on investment, average profit, profit growth, return on sales, and operating ratio, the non-financial metrics include schedule attainment, customer satisfaction, competitive performance, etc., to name a few. While financial indicators are crucial, non-financial measures are typically more practical for day-to-day operations monitoring (Maskell, 1991). The TISM study illustrates that the TL of the CEO leads to the development of an agile SC that would absorb the uncertainty, thereby enhancing the firm's performance. For example, effective leadership may serve as a driver for SCA as they foresee the need to be adaptable to grasp market opportunities. A transformational leader emphasizes the need for agility by explaining the vision, assisting subordinates in developing a solution to problems innovatively, and using their strengths to address the challenge (Oliveira et al., 2012). The resulting flexibility may help absorb short-term market volatility and improve business performance (Eckstein et al., 2015). These are the impact of TL and SCA on the organization’s economic condition.

According to the current literature, SCA helps a company minimize production costs, improve customer satisfaction, eliminate non-value-added tasks, and maintain a competitive position in the market (Braunscheidel & Suresh, 2009; Li et al., 2008, 2009). To support more predictable upstream demand, this always involves lowering SC uncertainty to the maximum extent possible (Mason-Jones et al., 1999). On the other hand, uncertainty is impossible to eradicate from the SC. As a result, SC is faced with the challenge of accepting uncertainty while developing a plan that allows them to balance supply and demand. However, uncertainty can be reduced by being alert to changes and developing response capability (Li et al., 2008). Li et al. (2008) contend that SC can be agile by being attentive to changes and creating response capability at strategic and operational levels. While alertness at the strategic level is to be able to detect changes in the macroeconomic environment like political and social change, demographic shifts, and technological advancements, at the operational level, alertness is the ability to detect changes in demand and supply by assessing market trends, listening to customers, and tracking real-time order using point-of-sale data. Likewise, changes in supply can be detected by sharing real-time information with all the partners. Response capability is the ability of the firm to respond to change in distinctive ways (Teece et al., 1997). In terms of strategy, intelligent firms develop the agility to distinguish themselves from competitors by developing skills to rearrange SC capabilities quickly and flexibly to adapt to macroeconomic changes. At the operational level, however, response capability refers to the chain's ability to respond (preemptively or retrospectively) to shifts in supply and demand by developing new work management rules, reallocating resources for work in progress, and monitoring the timing and duration of work cycles appropriately and elastically (Li et al., 2009). Lastly, large organizations achieve agility by investing in infrastructural resources, and small firms can achieve it by having simple IT systems, close relationships with SC partners, and attentive leadership (Ngai et al., 2011).

Leadership has always been the focus of organizational research, with scholars primarily exploring the impact leaders have on firm performance. However, extant literature comprises limited studies investigating the underlying reason for the performance outcome. This TISM analysis demonstrates that TL elements have the highest driving power influencing the other factors. Further, TL is most suited to managing operations in the current dynamic business environment (Bass et al., 2003). For example, in the dynamic business environment, firms must be agile to absorb fluctuations in demand. As leadership effects are higher in smaller firms (Miller, 1983), TL practiced by the CEO can act as a source of competitive advantage. Transformational leaders achieve agility by setting and communicating a vision, establishing strong values, and formulating guidelines to be followed in the face of a crisis. They exhibit confidence and power and make sound judgments in the interest of SC (Bruch & Walter, 2007). They foresee the uncertainty in the business environment and motivate SC members to adapt to the change by demonstrating great perseverance and commitment, upholding strong ethical ideals and moral conduct, sacrificing personal gain for the benefit of SC members, prioritizing the needs of SC members over their own, and share success and risk with SC members (Limsila & Ogunlana, 2008). These leaders develop a beautiful picture of the future and reinforce the need to be agile among SC members (Bi et al., 2012). Further, a transformational leader encourages SC members to be innovative and persuades them to be flexible by solving old problems in new ways (Erkutlu, 2008). Lastly, these leaders consider each SC member a unique firm and help them develop their capabilities by considering their maturity levels (Bi et al., 2012).

To put it another way, leaders establish meaningful relationships with each individual of the SC, pay attention to their growth and success needs, and act as a coach or mentors to help SC members reach their full potential in a supportive environment (Limsila & Ogunlana, 2008). These practices of the leader create an environment where SC members exhibit “extra effort” and commitment, thereby enabling the absorption of uncertainty (Blau, 1964; Mesu et al., 2013). While the established models measure firm performance, they do not assist managers in controlling and implementing the practices to enhance firm performance. However, the proposed TISM model assists managers in implementing the procedures for enhanced performance and elucidates what is happening along with why it is happening.