Exploration versus Exploitation: Leadership and the Paradox of Administration

Focused on small firms, this paper explores the effectiveness of transformational versus transactional leadership in responding to disruptive environmental change and the need for the firm to balance the exploitation of its existing domain against the need to explore new ventures and modes of operation. The study finds that firms under transformational leadership were more effective in the development of new products, markets, manufacturing and management systems, and new skills and capabilities and earned greater revenues in the process. The study finds the best overall financial performance among the small number of firms whose owners combine both types of leadership.