Turbulent change in business environment has increased the ongoing dilemma in public sector organizations. On the one hand, it must work in a more effective and flexible way to adapt to the change; on the other hand, it must comply with the rules and procedures. Many studies have shown that the existence of a strong leader is significant to manage those challenges (e.g. Osborne & Gaebler 1993; Wilson, 2000). This situation has also led to the development of flexible organizations, one of which is called lateral organization (Galbraith, 1994). In addition, some studies found that different environmental situations need different leadership styles, and transformational rather than transactional leadership style is more appropriate to implement change (e.g. Bass, Avolio, Jung, Berson, 2003). This study explored the relationship between leadership styles and lateral capability of public sector organization. It also examined the moderating effect of environmental characteristics (dynamic or static) on this relationship. The setting of this study was a state-owned power utility company in Indonesia that has moved toward a flatter organization for more than five years. Bass's Multifactor Leadership Questionnaire (MLQ) was used to measure the leadership style, Duncan's instrument was used to determine the environmental characteristic (static or dynamic), and Preziosi's Organizational Diagnostic Questionnaire (ODQ) was used to measure the lateral capability of the organization. This study found the relationships between transformational leadership and lateral capability was significant and positive while this relationship was significant but negative for passive leadership. However, the relationship between transactional active management by exception and lateral capability was not significant. The possible reason for this weak relationship was the reduction of transactional leadership components from originally three components to one component as a result of factor analysis. One component, contingent reward, merged with transformational leadership variable and another component, passive-management-by-exception, moved to laissez-faire variable. Consequently, active-management-by-exception is the only component left in the transactional leadership variable. Such component regrouping was consistent to the findings in prior studies that also found a low discriminant validity between transformational leadership and contingent rewards component and a high correlation between passive-management-by-exception and laissez faire (Avolio, Bass, & Jung, 1999). Future research is recommended to conduct a similar study in other public sector organizations such as health services, police departments, social services, research departments, and other governmental organizations.
Turbulent change in business environment has increased the ongoing dilemma in public sector organizations.