The strategic role of digital transformation, dynamic and agile capabilities for the performance of micro, small, and medium enterprises (MSMEs)

PurposeThis study aims to analyze the effect of digital skills on digital transformation, dynamic capabilities and organizational agility in micro, small and medium enterprises (MSMEs), as well as their collective impact on MSMEs' performance.Design/methodology/approachData was collected from 510 MSMEs registered in six different databases through an online questionnaire distributed via an instant messaging application from May to June 2024. The questionnaire was validated by experts through focus group discussions (FGD). To prevent bias, clear items, detailed instructions and different measurement scales were used. The study area was concentrated in the Java Island region and Jakarta. The collected data were analyzed using partial least squares-structural equation modeling (PLS-SEM).FindingsStrong digital skills enhance the digital transformation and dynamic capabilities of MSMEs, which enables rapid response to change and timely strategic decisions. Furthermore, digital transformation followed by good dynamic capabilities can enhance the MSMEs' performance.Research limitations/implicationsThis research is limited by MSME heterogeneity, industry differences, sampling bias, lack of external factor control and narrow performance measures, which may affect the generalizability and comprehensiveness of findings.Practical implicationsThis study encourages MSMEs and policymakers to adopt structured digital transformation by integrating technology, skills and agility, supported by fiscal incentives and collaboration to boost competitiveness and growth.Originality/valueDigital transformation and dynamic capabilities play a crucial role in enhancing the performance of MSMEs, which use simpler digital technology compared to large enterprises.