Most Effective Small Business Leadership Styles

Starting a small business can appeal to people who want to pursue their own ideas and have complete control over their time, career, and earning potential. But running a successful small business requires more than a great idea. It requires the ability to problem-solve, market yourself, manage others, motivate, and most importantly, lead.

In the context of running a successful small business, strong leadership requires the ability to lead employees and the company as a whole, especially during trying times. It is challenging for a small business to grow, expand, retain key talent, and ultimately succeed without effective leadership.

So, what does it take to be an effective small business leader? And what are the best leadership styles for growing a small business? The answer to both of these questions is, “It depends.” The most productive leadership style will vary from business to business since every leadership style is different. Each offers unique benefits and drawbacks. Some are more effective in certain workplace environments than others.

Below we’ll explore the different leadership styles, the pros and cons of each, and help you identify a correct fit for your personality, business management style, and unique work culture. But ultimately, you will determine your own most effective leadership style. What is most important is that you identify how you will lead, and apply it in every aspect of your business.

Not ALL Leadership Styles Are Effective

Before we get to the effective leadership styles, it’s worth noting that there are many more leadership styles than those I’ve listed in this article. However, many leadership styles once considered mainstream, are now ‘outdated’, and don’t have a place in today’s modern workforce.

A brief example would be the Autocratic leadership style. As implied by the name, the Autocratic leadership style is one of ‘do as I say and don’t question me’. The attitude of the Autocratic leader is often “my way or the highway.” This style was widely accepted during the early 1900s and is still common in environments where absolute control is necessary. However, this leadership style shows a lack of trust in employees, doesn’t allow for high levels of collaboration and isn’t effective for growing a successful small business.

While some might argue there are situations to utilize such an approach, I feel overall the Autocratic leadership style, and similar approaches, falls short by massive margins compared to the other styles on our list of effective leadership styles.

Employees are a small business’ greatest asset. While leadership styles will vary from company to company, an effective leadership style should at minimum engender a sense of trust and caring so employees feel safe and valued. Remember, your employees can help you overcome a range of problems that you wouldn’t solve on your own.

So, on to effective styles.

1. Authoritative Leadership

The word ‘Authority’ might not leave the best taste in everyone’s mouth, especially not when coupled with a leader, but the truth is there are many facets to authoritative leaders that make them effective.

The authoritative leader is the one leading by example. They bring their immense energy to the forefront of their business and show their team what they expect from them. These confident leaders consistently engage with their team to transfer their energy to their staff. They work with employees, leading and coaching them to success.

These leaders are exceptional at minimizing confusion in the team since they are always ready to provide explanations – if they haven’t already done it – and will happily assist their team in taking the next steps on the project since they understand strengthening weak cogs benefits the whole business. These leaders also place merit on the opinions of their team and will always explain their thinking instead of simply issuing orders that the team must adhere to without question.

The Pros of Authoritative Leadership:

• Inspirational – authoritative leaders inspire through example and by assisting employees in the work process
• Facilitates decision-making – authoritative leaders quickly make important decisions on their own without consulting employees
• Produces consistent results – provides defined tasks that lead to exact specifications and outcomes
• Reduces mistakes – employees rules that lead to fewer deviations and mistakes
• Clarity of command – with the authoritative leadership style employees know who is in charge
• Boosts productivity – processes and expectations are clearly established so employees can focus on completing tasks

The Cons of Authoritative Leadership:

• Employees rebel – authoritative leaders can feel quite “in-your-face”. Employees may resent being micro-managed or told exactly what to do
• Reduces collaboration – diverse sets of opinions and input are not always considered
• Lack of creativity – as authoritative leaders do not always consult with teams and employees, creativity can be suppressed

The authoritative leadership style works well in environments where business needs must be met quickly and will minimal error. It is ideal where decision-making delays are costly. Authoritative leadership is common in construction and manufacturing industries, as well as military, heavy industry, laboratory experiments, critical healthcare/first responder and search and rescue.

2. Democratic Leadership

If autocratic leadership is one to avoid in today’s business world, Democratic Leadership would be the opposite. This type of leadership is often also referred to as Participative Leadership, and rightly so since it involves the whole team.

These leaders value the input of their team members as much as their own opinions, which is often what makes this leadership excel. With so many business-related problems being solvable with another pair of eyes, it’s easy to see why so many choose to lead democratically in their small business. While the leaders ultimately retain the decision-making power, it’s always good to hear everyone’s ideas on a matter before making a decision.

While this leadership style makes everyone feel like part of the team and play an important role, it can also result in decision-making taking longer, so be ready to take quick notes and move on when you feel you’ve spent enough time listening to input.

This type of leadership is an excellent choice for smaller teams where bouncing ideas doesn’t require the convening of a twenty-person meeting every time.

The Pros of Democratic Leadership:

• Collaboration – employees are encouraged to share ideas, voice their opinions and have be heard (while the leader retains the final decision.)
• Engagement – team members are more engaged in business and decision-making processes and outcomes.
• Encourages creativity – employees are incentivized to be creative.
• Engenders trust – inspired trust and respect of leaders.
• Improved job satisfaction – employees report higher levels of job satisfaction leading to lower turnover.

The Cons of Democratic Leadership:

• Slow decision making – can take overly long to make important decisions when opinions and input are considered from multiple stakeholders and team members. Does not work well where critical and timely decision making is required.
• Lower quality results – some employees may lack the necessary experience and qualifications to bring valuable input forward, resulting in suboptimal outcomes.
• Lack of accountability – when multiple opinions lead to poor decisions leadership may point the finger at the employees. Responsibility for failure should lie with leadership.
• Individuals must be skilled – employees must be experienced and sufficiently knowledgeable to provide meaningful input and opinion.

The democratic leadership style is best in business and organizations where leaders surround themselves with competent and experienced managers and employees. For the democratic leadership style to be effective, employees must be skilled and perform their job under minimal supervision. Democratic leadership works well in the pharmaceutical industry, hospitals and labs, private companies, nonprofits, startups, real estate, educational institutions and in high tech firms.

3. Collaborative Leadership

A step beyond democratic leadership, you have Collaborative Leadership. The main difference comes down to how involved the leader is with the team. Where democratic leaders value their team’s input on decision-making, collaborative leaders spend much more time working with the team during every part of the project.

This leadership style is easily one of the most popular in small businesses, especially given how naturally close-knit small business teams are by default. Many leaders in small companies – especially start-ups – step into this leadership role without considering a style.

The greatest strength of collaborative leadership is integrating the leader into the team as a member and not necessarily as someone to whom the others report. The leader will be in the middle of everything, consistently discussing matters with the team, keeping them up to date on everyone’s progress, and being as involved as any other member for the entire journey.

The Pros of Collaborative Leadership:

• Improves problem solving and decision-making – encourages input from employees to improve the decision-making process and ability to solve complex problems.
• Fosters a team environment – everyone feels equally valued for their input in decision-making and their work on projects. Employees become more loyal to one another.
• Reduces workload responsibilities – employees adopt a “divide and conquer” mentality. While the overall workload is the same, working together makes the load lighter.
• Higher morale & retention – employees feel their ideas are valued leading to higher job satisfaction and lower turnover.
• Improved productivity – collaboration helps ensure projects are completed and deadlines are met. Work is divided between employees based on area of expertise and individuals are held accountable by their team mates.

The Cons of Collaborative Leadership:

• Reduces face-to-face interaction – modern collaboration is defined by the move of information rather than face-to-face interaction. Some collaboration is entirely remote.
• May lead to stress and burnout – provides fewer opportunities for employees to shut down because they feel the need stay connected online with their team (even after hours.)
• Increases costs – collaboration often requires more employees per project in order to support mentorship roles. Collaboration for remote workforces requires high technology investments.
• Leads to ambiguous roles – strict job definitions must be created to ensure each team member knows and focuses on their specific responsibilities.
• Can lead to group think – collaborative leadership can lead employees to ignore dissenting opinions and important information, and make poor decisions.

As with the democratic leadership style , collaborative leadership is best suited for businesses and organizations with competent managers and employees. Industries that can benefit most from collaborative leadership are those where collaboration has proven to improve business outcomes. These industries include healthcare, education, technology and certain manufacturing sectors.

4. Coaching Leadership

One of the more complex types of leadership roles to utilize, Coaching Leadership emphasizes the leader’s understanding of every member’s role in the team. ‘Role’ in this case does not refer to their job title but more to how they benefit the group as a person. What are their strengths, and how do you steer them away from their weaknesses?

Coaching leaders take it upon themselves to be the guide of every member. They identify which areas of a person’s skills to focus on – especially when handing out tasks – thereby enhancing the strengths of individuals rather than trying to get them to fit into roles where they might fall short.

Team building also plays a significant role in this type of leadership. The coaching leader will actively want to gauge where individuals have grown, whether their strengths have improved, or whether their weaknesses have been overcome. This type of leadership requires a careful eye for detail, an innate understanding of individual analysis, and a person who knows how to put people into suitable positions.

The Pros of Coaching Leadership

• Positive workplace environment – creates stable, positive work place environments through helping other improve their performance.
• Establishes clear expectations – leaders clearly communicate what is expected of each employee. Helps everyone get on the same page and understand their contribution.
• Improves workforce skills – leader coaches help improve individual skill competence levels leading to higher quality work and productivity.
• Lower turnover rates – as leaders invest in employees through coaching, turnover rates go down—leading to a competitive advantage for the employer.
• High employee satisfaction – employees receive high value from their job as the leader nurtures their strengths over time and helps them overcome their weaknesses.
• Improved productivity – as weaknesses turn into strengths, and individual skill sets improve through coaching, productivity improves.

The Cons of Coaching Leadership

• Requires time commitment – nurturing individual strengths requires patience as it can take longer than initially expected. Businesses must be willing to make the upfront investment and wait before this leadership style yields dividends.
• Requires qualified leaders – when coaching leaders are not skilled at mentoring or coaching there is a risk individual employees receive advice that does not improve skills development.
• Not ideal for all businesses – not a choice of leadership that fits well with high-intensity environments that thrive on deadlines. Additionally, employees must buy into this leadership style or the coach leader will work harder than the employee being mentored.
• Requires skilled leader coaches – not all good coaches are good leaders, and vice versa. This leadership style requires both skill sets.

The coaching leadership style works best in low-intensity workplace environments where there are no critical deadlines. Coaching leadership style is ideal for businesses that offer career oriented positions where employees have long-term career prospects and the employer wants to reduce turnover. Industries where coaching leadership has proven effective include government, non-administrative healthcare sectors, sports teams, real estate, educational and training, food manufacturing, and business & financial consulting.

5. Transformational Leadership

Transformational Leadership is by far the most flexible and popular leadership styles, being a style that can suit any environment and team. The focus of transformational leadership is to motivate and inspire employees to effectuate change within the organization.

Transformational leaders pride themselves on their ability to identify shifts in their own industry and the business sector as a whole. They use these skills to adapt their team to the environment, whether that means changing tactics on an ad campaign, finding better work flows, capitalizing on new strategies or even adopting disruptive technologies.

Businesses that utilize transformational leadership often require a more dynamic or creative space. What works the one day might fall short the next, and the whole team must understand how to adapt with the leader’s assistance.

The Pros of Transformational Leadership

• Adapt to change – the ability to adapt quickly to change is a huge benefit in numerous sectors, and especially for the small business, since it allows the business to excel where others would fall under pressure.
• Inspirational – where transactional leadership employs a reward and punishment system to influence employee behaviour, transformation leaders motive employees by sharing their vision and helping each employee reach their full potential.
• Promotes unity – employees flock to the transformational leader and unit around a common cause or purpose. When everyone rallies around a common purpose, productivity increases and better bottom-line results are achieved.
• Reduces turnover – employees feel more engaged, included and united, and are less likely to quit. Employees who fit in and feel part of the culture stick around.
• Improves communication – transformational leaders provide clear and consistent messaging reminding employees what the big picture is and what role they place in achieving corporate goals.

The Cons of Transformational Leadership

• Disruptive – while transformational leadership style is ideal for creating and embracing positive change within an organization, when leadership becomes fixated on change as the end goal, is can produce negative outcomes.
• Poor actualization – transactional leaders may rally employees around a common vision, but actualizing that vision can provide difficult in some organizations. When a vision is too big, as can be the case with the transactional leadership style, there may be a lack of clear operational strategy.
• Too big-picture – is too conceptual without clear business level tasks and concrete operational strategies for achieving the vision.
• Employee Burnout – not all employees buy in to the transformational leadership style. Some employees will feel inspired, while others will feel pressured by the continual focus on achieving a grand vision.
• Requires a continuous feedback loop – transformational leadership requires constant communication to be effective. The moment communication breaks down, and an employee feels excluded, he or she will likely loose commitment to the leaders vision.
• Too much freedom – where transactional leadership style uses rewards and punishments to influence workers, transformational leadership inspires employees to perform. But when employees don’t feel inspired, a transactional leader looses he ability to influence employee performance.

Transformational leadership is crucial for businesses that are focused on change and evolving. It is an ideal leadership style for dynamic and innovative work place environments, such as tech startups. It is also common in industries—such as construction, manufacturing, technology, entertainment and corporate management—that rely on teams to meet organizational goals.

6. Laissez-Faire Leadership

Often regarded as a somewhat controversial approach to work, Laissez-Faire Leadership has proven it can be an extremely effective tool with the right team. Requiring a tolerant, patient leader, this type of leadership focuses on delegating tasks and leaving the teams to do their own thing – so long as they perform and deliver on time. Laissez-Faire leaders exhibit the utmost trust and reliance with their employees. Laissez-Faire leader never micro-manage their teams.

While this might sound fantastic to the staff, it is important to recognize that not every individual can do their work and deliver on time if not consistently supervised. Where some people thrive under pressure, the team under the Laissez-Faire Leader thrives on self-motivation and a firm understanding of the importance of committing to the deadlines on their own.

This leadership approach works much better with experienced staff who don’t require the leader to look over their shoulder and constantly check up on everything they do. On the flip side, this approach is unsuitable for inexperienced staff who have trouble taking the reins and the initiative when necessary.

The Pros of Laissez-Faire Leadership

• Improved productivity – laissez-faire leadership empowers employees to make decisions and move forward without constant oversight and decision-making from a manager.
• Greater flexibility – decisions can be arrived at more quickly when employees are allowed to collaborate and bring different strengths to the table when decisions need to be made.
• Greater initiative – employees are allowed to more free apply their expertise and take personal initiative when faced with projects and challenges.
• Boosts morale – provides a more relaxed working environment where people feel you trust their skills and discernment. Employees feel comfortable sharing their ideas and opinions.
• Promotes creativity and independent thinking – outside the box thinking from employees is valued. Individuals are encouraged to solve matters independently, speak up and share their expertise and ideas.
• Greater job satisfaction – individuals don’t feel micro-managed, or that a supervisor is constantly looking for their shoulder.

The Cons of Laissez-Faire Leadership

• Increased group conflict – disagreement between mid-level leadership can slow productivity when there is a lack of executive level decision making. With laissez-faire leadership style, conflicts may need to be resolved by making occasional executive decisions.
• Lower role awareness – the lines between employee, manager and leader can become blurred. Under-qualified individuals may take on the role of leader when not merited. Managers may not be seen and respected as supervisors. Role confusion exists.
• Lack of direction – limited supervision may lead to misalignment of direction. When everyone’s input is valued, establishing a clear direction can be difficult at both the individual and project level.
• Lack of structure – may lead to inexperienced staff having difficulty integrating into the team and falling short of expectations. Entry level employees may feel overwhelmed by the lack of structure and the need to become leaders themselves.
• Requires a specific type of employee – this leadership style works well with a lot of organizations but it requires employee buy-in. Individual must also very competent in their trade.

The laissez-faire leadership style works best in workplace environments where employees have a high level of passion for their work and are highly skilled at their trade. Both Berkshire Hathaway (under Warren Buffett) and Apple (under Steve Jobs) were known for their laissez-faire style of leadership. If your employees are capable, confident and motivated, your small business might benefit from following Buffet’s laissez-faire management style. Laissez-faire leadership style tends to work most effectively in retail buying (e.g. fashion), entertainment (e.g. music, film) , technology, advertising agencies, product design firms, R&D, venture capital firms, specialized engineering firms and high-end architectural firms.

Conclusion

Regardless of which leadership style you prefer, the most important thing is that you find the style that makes you and your staff the most comfortable, productive versions of yourselves. Be open to trying out a style and seeing how it works. You can always adapt your leadership style to meet the unique needs of your small business as your work place evolves. You can even create a hybrid leadership style combining the elements of several leadership styles.