Tackling digital transformation strategy: how it affects firm innovation and organizational effectiveness

Small and medium-sized enterprises (SMEs) play a crucial role in supporting the country's economy. However, Spanish SMEs have not developed their full potential. It is thus essential for managers to seek and adopt better strategies to be more successful. In today's turbulent environments, digital transformation strategy is considered an important strategic competitive resource. Given its importance, managers are encouraged to develop their capabilities to deal with digitilization efficiently, leading them to be more innovative and obtain higher levels of organizational effectiveness. There is extensive research in the literature on the effect of digitalization strategy on organizational effectiveness, with it being considered a composite construct. Little research has been conducted, however, to examine the independent effects on its economic, human resources and internationalization dimensions. Based on the Input-Mediator-Output framework, this study aims to highlight the mechanisms through which digital transformation strategy improves organizational effectiveness. Specifically, this article examines (1) the direct effect of SMEs' digital transformation strategy and organizational effectiveness on their economic, human resources and internationalization dimensions, and (2) the mediating role of firm innovation in these relationships. To test our hypotheses, we randomly selected SMEs operating in Spain from the INE 2022 database. The selection framework used was the SABI database developed by Faedpyme (2023). Once the data were filtered, information was obtained for 1,113 SMEs. To test our hypothesis, we used structural equation modeling (SEM) based on partial least squares (PLS) and Smart PLS 4.0.9.9. PLS-SEM is a robust statistical technique that allows for the positing of direct and mediated relationships simultaneously between the study variables. Our results revealed that digital transformation strategy has a positive impact on the economic, human resources and internationalization dimensions of organizational effectiveness. Furthermore, we found that firm innovation partially mediates the positive influence of digital transformation strategy and the three dimensions of organizational effectiveness. Thus, SMEs that wish to improve their effectiveness should orient their strategy towards higher levels of firm innovation. Testing this model contributes to the literature in two ways. First, it sheds new light on how digital transformation strategy fosters higher levels of organizational effectiveness in SMEs, specifically, in its economic, human resources and internationalization dimensions, which have not hitherto been analyzed in the literature. Second, our results add to the organizational effectiveness theory, which is dominated by research on large firms. They also extend the evidence that digital transformation strategy and firm innovation are positive for organizational effectiveness in SMEs.