Microstructure evolution in single crystal and polycrystal shape memory alloys under uniaxial tension and compression is investigated using the finite element method. To determine stress-strain diagrams and evolution of martensitic microstructure during external loading, a micromechanics based thermo-mechanical material model is used. The results reveal the significant difference between the local and global material behavior when defects are present. It is shown that defects act as nucleation sites and result in transformation localization, which in turn causes a sudden drop in the stress-strain diagram followed by a stress plateau. Moreover, it is found that some regions undergo reverse transformation although the elastic moduli of the phases are equal and the loading is monotonic. Increase in athermal friction, which is the resistance to interface propagation, is found to delay the phase transformation and different magnitudes of hysteresis are obtained at different friction values. The model predicts the tension-compression asymmetry observed in shape memory alloys. The simulation results are in qualitative agreement with several experimental studies. (C) 2015 Elsevier Ltd. All rights reserved.