Small and medium-sized enterprises dynamic capabilities and competitive advantage: The mediating effect of digitalization

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 rela-tionship 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 dy-namic capabilities, digitalization, and competitive advantage. Findings: We found that dynamic capabilities, except for coordinating capability, positively influence the im-plementation of digitalization. This highlights the role of these capabilities in utilizing digital technologies ef-fectively. The study also revealed a positive relationship between digitalization and SME competitive ad-vantage. Furthermore, the study showed the significant role of digitalization in mediating the associations between sensing capability, learning capability, integrating capability, and competitive advantage. These find-ings 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 ad-vantage through digitalization include the importance of improving sensing capability for market understand-ing, 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 dy-namic 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 digitali-zation's mediating role