Transforming Strategy into Performance: Digital Capabilities and SME Success in the Digital Economy

Abstract

Digitalization has expanded market opportunities for small and medium-sized enterprises (SMEs), yet technology adoption alone does not guarantee superior performance. This study examines how business strategy orientation and digital transformation capability shape digital marketing capabilities and SME performance, while testing digital marketing capabilities as a mediating value-conversion mechanism. A quantitative cross-sectional design was employed among SMEs participating in the Desa Prima program in Sleman Regency, Special Region of Yogyakarta, Indonesia. Data were collected from SME owners or managers through a structured questionnaire and analyzed using Partial Least Squares Structural Equation Modeling (PLS-SEM). The results show that business strategy orientation positively influences digital marketing capabilities (β = 0.508) and SME performance (β = 0.416), while digital transformation capability positively influences digital marketing capabilities (β = 0.330) and SME performance (β = 0.246). Digital marketing capabilities also improve SME performance (β = 0.273). In addition, digital marketing capabilities partially mediate the effects of business strategy orientation (β = 0.138) and digital transformation capability (β = 0.090) on SME performance. The model explains 39.6% of the variance in digital marketing capabilities and 49.8% of the variance in SME performance, with acceptable model fit (SRMR = 0.060; NFI = 0.951). The study contributes an integrated strategy–technology–marketing capability framework that explains how SMEs convert strategic direction and digital resources into market outcomes.