Small and medium-sized enterprises dynamic capabilities and competitive advantage : the mediating effect of digitalization$f202

Objective: The aim of the article is to examine the interplay among dynamic capabilities, digitalization, and competitive advantage, with a specific focus on exploring the mediating influence of digitalization in the relationship between dynamic capabilities and competitive advantage among small and medium-sized enterprises (SMEs) in the Indonesian context. Research Design & Methods: We utilized a survey method for the collection of primary data. The respondents were SME founders in the provinces of Central Java and North Kalimantan, Indonesia, with a minimum of one year of business engagement. Moreover, we utilized Partial Least Squares Structural Equation Modelling (PLS-SEM) analysis on 230 collected responses to examine the proposed hypotheses on the relationships among dynamic capabilities, digitalization, and competitive advantage. Findings: We found that dynamic capabilities, except for coordinating capability, positively influence the implementation of digitalization. This highlights the role of these capabilities in utilizing digital technologies effectively. The study also revealed a positive relationship between digitalization and SME competitive advantage. Furthermore, the study showed the significant role of digitalization in mediating the associations between sensing capability, learning capability, integrating capability, and competitive advantage. These findings underscore the importance of developing dynamic capabilities to facilitate digitalization for enhancing competitive advantage in the digital era. Implications & Recommendations: The study's implications for SMEs seeking to enhance competitive advantage through digitalization include the importance of improving sensing capability for market understanding, cultivating a learning culture for employee tech updates, and strengthening integrating capability by seamlessly incorporating digital technology into existing processes and functions. Contribution & Value Added: While many studies have concentrated on evaluating the direct impact of dynamic capabilities on firm competitive advantage or exploring different mediating factors, this research explored the indirect effects of SME’s dynamic capabilities on competitive advantage, delving into digitalization’s mediating role.