The influence of transformational leadership on employee performance through dynamic capability and organizational learning

2.1 Employee performance

The calibre of an organisation’s employees determines how well it can deliver services.¹⁶ According to Kasmir,¹⁷ performance is the outcome of a person’s job and work behaviour throughout an interval, often one year. It can be assessed regarding productivity inside the organisation, work efficiency and quality, and service delivery. Bernardin and Russell¹⁸ view performance as an outcome record produced by a particular task or activity within a given time frame. An individual’s performance reflects their capacity to accomplish assigned tasks based on their skills, experience, dedication, and the amount of time they can devote.¹⁹ Employees in an organization are recruited to perform particular duties that contribute to the achievement of the company’s stated goals.¹⁹

Organisations continue to design training activities and look out for employee behaviours that could be tapped into to improve their performance.²⁰ Employee job performance information becomes helpful in organisations in terms of performance appraisal, feedback, promotions, and merit pay systems.²¹ Employee performance, a focal industrial/organizational psychology theory, is arduous to define or measure due to different or multiple aspects of job-role behaviour assessments. In some contexts, it is referred to as task or in-role performance relating exclusively to completing tasks specified in job descriptions.²² Others, like Mathias & Jackson²³ and Bohlander et al.,²⁴ conceptualise employee performance as the employee’s acumen to accomplish work goals, fulfil expectations, and meet job targets. Though many definitions have been proposed for employee performance, the study adopts Viswesvaran & Ones²¹ definition of performance as scalable actions, behavior and outcomes that employees engage in or bring about that is linked with and contribute to organizational goals.

Employee performance denotes the overall financial or non-financial outcome of an employee’s actions directly impacting the organisation’s performance and success.²⁵ In organizational contexts, performance is commonly defined as how an organizational member (employee) contributes to achieving the organisation’s goals.²⁶ It results from fulfilling assigned responsibilities, meeting deadlines, demonstrating competency, and exhibiting effectiveness and efficiency in work execution.²⁷ Scholars have identified three dimensions of employee performance: task performance, contextual performance, and adaptive performance.²⁸ Task performance concerns the fundamental job responsibilities of workers and is often referred to as “in-role prescribed behaviour”.²⁹ On the other hand, adaptive performance pertains to how an individual employee adjusts to changes in the job role or work environment.²⁷ In addition to task and adaptive performance, attention has been directed towards understanding the significance of non-job performance components for enhancing the workplace. Scholars have defined this as contextual performance, encompassing voluntary employee actions that provide intangible benefits to businesses.^27,30

2.2 Transformational leadership

According to Bass,³¹ transformational leadership has a more positive impact on performance than transactional leadership. Leaders who employ a transformational style tend to possess charisma, inspire others, and stimulate intellectual engagement among their subordinates. Moreover, numerous studies indicate that Transformational Leadership is strongly associated with improved performance and demonstrate that transformational leadership behaviours positively contribute to subordinates’ effectiveness in various organizational contexts.

Downton³² introduced the term Transformational Leadership, which was further developed by³³ in his work “Leadership”. Burns sought to link leadership roles with their followers, highlighting the crucial aspects of this relationship. The Transformational Leadership approach encompasses various dimensions of the leadership process, where leaders empower and motivate their followers to embrace change. Transformational leaders create an environment where employees feel encouraged to actively participate, engage in open discussions, and take the initiative to try new things. Avolio & Gibbons³⁴ emphasised that Transformational Leaders exhibit strong moral values, have a clear identity, and can build trust and collaboration with others.

Leadership style can predict organizational performance.⁶ This is one of the most essential aspects influencing organizational and employee performance.⁷ Leadership can influence performance because leadership is the primary determinant of the success or failure of an organisation, group, and even a nation.³⁵ The organisation is inclined to focus on leadership since it is considered a technique for improving performance and handling impulsive situations.³⁶

Manzoor et al.⁶ conducted a study on Small and Medium Enterprises (SMEs) in Pakistan with 130 respondents. The results showed that transformational leadership has a positive impact on employee performance. Mahmoud³⁷ indicated that the transformational leadership style positively and significantly affects employees’ job performance. These previous studies suggest that transformational leadership is vital to employee performance. Thus, the following hypothesis is formulated.

2.3 Dynamic capability

The dynamic capabilities approach seeks to comprehend and elucidate firms’ competitive advantage over time.³⁸ Dynamic capabilities are defined as a firm’s capacity to modify its resource base to adapt to rapidly evolving environments.³⁹ It has been posited that dynamic capabilities encompass the ability to maintain successful adaptations.⁴⁰ These capabilities are inherently tied to the firm and evolve,⁴¹ making them challenging to observe and even more arduous for other organisations to replicate. Consequently, they are closely associated with sustaining competitive advantage, particularly in environments of constant change.

Barreto⁴² characterises dynamic capability as the inherent capacity of a firm to effectively address challenges, which is cultivated through its ability to detect opportunities and risks, make timely decisions aligned with market demands, and adapt its resource portfolio. Similarly, Teece³⁹ outlines three key dynamic capabilities: (1) the ability to sense and influence opportunities and threats, (2) the capacity to seize on opportunities, and (3) the maintenance of competitiveness by enhancing, integrating, protecting, and, if needed, reorganising the company’s tangible and intangible assets.

Lopez-Cabrales et al.⁴³ researched managers in 107 industrial firms. The study indicates that implementing effective transformational leadership will produce more dynamic capability. Similar findings were also obtained by Wamalwa.⁴⁴ Transformational leaders encourage individual and collective learning by intellectually stimulating and guiding followers to adopt fresh viewpoints, challenge assumptions, foster curiosity, take calculated risks, and devise innovative problem-solving approaches.⁴⁵ These previous studies suggest that transformational leadership is essential in dynamic capability.

The study conducted by Bienkowska and Tworek⁴⁶ aimed to fill the research gap by developing the concept of Employees’ Dynamic Capabilities (EDC) and testing its impact on Employee Performance. The results of this study indicate that EDC can be a prerequisite for sustainable organizational development through employees. Meanwhile, the findings of Tworek et al.⁴⁷ have the potential to support the development of new models and theories that explain the relationship between EDC, job performance, and organizational performance in crisis contexts.

2.4 Organizational learning

According to Senge,¹⁴ there are three classic theories of organizational learning: 1) the theory of experiential learning from the “cognitive” tradition; 2) the theory of adaptive and generative learning, also from the “cognitive” tradition; and 3) the theory of assimilation from the “behavioural” tradition. Among these three theories, the Adaptive and Generative Learning theory is critical as it is a continuous improvement process. The main characteristic of this theory is its focus on existing knowledge and the ability to transform it through new thinking to achieve goals.

Organizational learning is a process whereby organisations systematically enhance and integrate individuals’ knowledge into the organizational knowledge system. This process occurs through interactions within communities where knowledge is created by the organisation, evolving in the continuous dynamics between tacit and explicit knowledge, making organizational learning a vital necessity.⁴⁸ According to García-morales et al.⁴⁹ and Dibella et al.,⁵⁰ organizational learning is the organisation’s ability to maintain or improve performance based on experience. Organizational learning is influenced by internal and external factors: organizational structure, culture, leadership, knowledge sharing, internal work environment, external networks, and organizational members’ experiences.⁵¹

Mutahar et al.⁵² analysed the relationship between transformational leadership and organizational performance mediated by organizational learning. The study showed a strong relationship between transformational leadership and organizational performance. The research findings also indicated a positive correlation between transformational leadership and organizational learning, supported by other studies.^49,53 The greater the influence of transformational leaders, the more organizational learning occurs.

Nam and Park⁵⁴ conducted previous research on organizational learning’s influence on employee performance. The research findings indicate that the aspect of organizational learning culture has a positive impact on transformational leadership and employee performance. Furthermore, it was also found that Cultural Intelligence has a positive relationship with transformational leadership and employee performance. Moreover, the research results confirm that transformational leadership positively influences employee performance. These findings support Kelman’s theory of social influence processes in an organizational context. The research results by Kumar & Singh⁵⁵ are consistent with the study conducted by Nam & Park,⁵⁴ which revealed that organizational learning positively impacts Employee Performance.

3.1 Participants and procedure

This study falls under explanatory research, seeking to elucidate the causal connections between independent variables (exogenous variables) and dependent variables (variables subjected to hypothesis testing).⁵⁶ Through data analysis, this research is categorised as quantitative, employing inductive and descriptive statistics to analyse sample data and draw generalisations.⁵⁷ The examined variables encompass Transformational Leadership, Dynamic Capability, Organizational Learning, and Employee Performance.

3.2 Questionaire development and instrument

The research targets all staff members, including directors, at PT. Pertamina Lubricants is located in various areas, such as the headquarters, sales regions, and production units across Indonesia, totalling 388 individuals. A sample size of 197 respondents was selected from this population. These respondents are chosen from 11 distinct zones, encompassing the headquarters, three production units, and seven sales regions distributed throughout Indonesia.

3.3 Research model

The gathered data underwent analysis using the Structural Equation Modeling (SEM) technique and the SmartPLS approach. This method thoroughly explores intricate interrelations between variables, enabling researchers to evaluate direct and indirect effects within a single model. This study’s structural model and hypotheses are depicted in Figure 1 below.

Figure 1. Research hypothesis model.

Source: Authors Work.

4.1 Measurement Model (Outer Model)

When examining the measurement model, researchers can explore the connections between latent variables and their associated indicators, as Hair et al.⁵⁷ outlines. The evaluation of the Outer Model, conducted using SmartPLS for data analysis, follows four crucial criteria: Outer Loading, Average Variance Extracted, Cronbach’s Alpha, and Composite Reliability. The subsequent Table 1 illustrates the outcomes of the Outer Model assessment, highlighting Convergent Validity, Construct Validity, Cronbach’s Alpha, and Composite Reliability. The model is deemed valid if it achieves an Average Variance Extracted (AVE) > 0.50, and it is considered reliable if it attains Composite Reliability > 0.70 and Cronbach’s Alpha > 0.60.⁵⁸

Table 1 summarises that all the indicators utilised to evaluate the constructs in this research, such as Transformational Leadership, Dynamic Capability, Organizational Learning, and Employee Performance, exhibit desirable characteristics. The indicators for these constructs display outer loading values surpassing 0.5, confirming their validity and effectively passing the convergent validity assessment.

Additionally, the table illustrates that each variable possesses an AVE (Average Variance Extracted) exceeding 0.5, confirming their validity. Consequently, it can be inferred that each of these indicators substantially contributes to explaining the respective latent construct, satisfying the criteria for construct validity.

Additional information from the table indicates that Cronbach’s Alpha values for Transformational Leadership, Dynamic Capability, Organizational Learning, and Employee Performance surpass 0.6. These results confirm the reliability of these variables for further data analysis. Furthermore, all variables in the table exhibit a composite reliability value exceeding 0.7, indicating their reliability. Thus, it can be inferred that the indicators within the latent variables demonstrate strong reliability.

4.2 Structural Model (Inner Model)

During the structural model analysis phase, the research hypotheses are thoroughly examined. The inner model depicts the latent variables’ interrelations, including recursive and non-recursive connections. Conversely, the structural model elucidates the relationships between the variables being studied. The coefficients within the model gauge the strength and direction (positive or negative) of the associations between each variable. Significant impacts between two variables are noted if the p-value is less than 0.05. The ensuing table, denoted as Table 2, provides the findings about the direct effects:

The SEM analysis results on the 5 research hypotheses show that 4 hypotheses are supported and 1 hypothesis is not supported. Hypothesis 1 shows that transformational leadership has a non-significant effect on employee performance with a p-value of 0.304. Next, in Hypothesis 2, it is found that transformational leadership has a significant positive effect on dynamic capability with a p-value of 0.001 and a path coefficient of 0.234. Hypothesis 3 is also supported, indicating that transformational leadership significantly and positively affects organizational learning with a p-value of <0.001 and a path coefficient of 0.445. In Hypothesis 4, dynamic capability has a significant positive effect on employee performance because the p-value is <0.001 with a path coefficient of 0.265. Meanwhile, Hypothesis 5 shows that organizational learning has a significant positive effect on employee performance with a p-value of <0.001 and a path coefficient of 0.403.

Aside from examining direct impacts, we also evaluated indirect effects or mediation using SmartPLS software, with the outcomes displayed in the following table (refer to Table 3).

Table 3 above reveals that dynamic capability does not mediate the effect of transformational leadership on employee performance. On the other side, organizational learning can mediate the effect of transformational leadership on employee performance. This suggests that Organizational Learning is the only intermediary between Transformational Leadership and Employee Performance in this study.