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Sustainability through digital transformation is essential for contemporary businesses. Embracing sustainability, micro-, small-, and medium-sized enterprises (MSMEs) can gain a competitive advantage, attracting customers and investors who share these values. Moreover, incorporating sustainable practices empowers MSMEs to drive innovation, reduce costs, and enhance their reputation.
- digital technology
- ICT
- management
- MSMEs
1. Introduction
In recent years, sustainability through digital transformation (DX) has emerged as a critical focus for micro-, small-, and medium-sized enterprises (MSMEs) [1]. This strategic combination of sustainability and technology adoption holds immense potential for driving positive environmental and social impact while ensuring the long-term viability of MSMEs [2,3].
DX enables MSMEs to integrate sustainable practices into their operations, fostering resource efficiency and minimizing their ecological footprint [4]. By leveraging technologies like data analytics, the Internet of Things (IoT), and cloud computing, MSMEs can optimize energy consumption, minimize waste, and make informed decisions that support sustainable manufacturing processes [5]. The adoption of these technologies not only benefits the environment but also enhances operational efficiency and cost-effectiveness for MSMEs [6].
Furthermore, DX empowers MSMEs to engage in sustainable supply chain management [7]. By utilizing Blockchain technology, companies can enhance transparency and traceability across the supply chain, ensuring ethical sourcing, fair trade practices, and responsible production. This level of transparency builds trust among stakeholders and satisfies the growing consumer demand for sustainable products and services [8].
In addition to environmental considerations, DX enables MSMEs to prioritize social sustainability [9,10]. Through digital platforms and e-commerce, these enterprises can reach broader markets, connect with socially conscious consumers, and communicate their sustainability initiatives effectively [10,11]. Engaging in digital marketing and storytelling allows MSMEs to showcase their commitment to social responsibility, fair labor practices, and community engagement, creating a positive brand image and attracting loyal customers [12].
Integrating digital technologies also facilitates the development of innovative solutions to societal challenges [9,12]. MSMEs can leverage artificial intelligence and data analytics to identify social needs, create sustainable products or services, and contribute to the well-being of communities. For instance, by utilizing AI-driven predictive maintenance, MSMEs can optimize equipment usage, minimize downtime, and extend the lifespan of their assets, reducing the need for resource-intensive replacements [13].
However, owners and senior managers of MSMEs often need more information to initiate a sustainable DX. Existing resources and literature focus on more giant corporations or provide general guidelines that may not address MSMEs’ unique challenges [14,15,16]. This lack of tailored information leaves them wanting to know where to begin and how to integrate sustainability and digitalization effectively [16,17].
The lack of specific guidance leaves owners and senior managers grappling with questions about technology adoption, aligning sustainability goals with business objectives, and managing financial constraints. They need help to assess their current digital capabilities, identify areas for improvement, and foster a culture of innovation within their organizations. This lack of clarity hinders their ability to simultaneously navigate the complexities of DX and sustainability. Furthermore, MSMEs may be unaware of the potential resources and support available through external partnerships and collaborations. Access to expertise and guidance is necessary for them to gain valuable insights that could inform their transformation journey.
2. Digital Capabilities
Digital capabilities are essential for enabling and driving DX within organizations. Digital capability can be seen as a dynamic capability that empowers companies to create new products and processes and adapt to market changes [18]. It involves leveraging technology affordances and establishing procedures that utilize human capital and knowledge assets to interact with specific digital technologies. These capabilities refer to digital systems that can autonomously generate new outcomes and structures without the system creator’s need for external actors or deliberate planning [19]. The impact of digital orientation and capability on digital innovation is significant, and they also play a mediating role in the relationship between firm performance, digital direction, and digital ability [20].
To ensure the successful adoption of technological innovations, organizations require to identify the need for such advancements [21]. Adopting digital tools becomes crucial for enhancing the effectiveness of organizational functions and processes [11]. Digital capabilities enable organizations to leverage the information available from the environment and incorporate technology more efficiently in alignment with their value proposition [22].
However, many companies interested in DX need help building their IT organizations, developing necessary tools, and nurturing the required talent to manage digital information and establish online services and automated processes [23]. Often, these companies need to pay more attention to the fact that critical resources for DX may be readily available internally. While internal capability development takes time, seeking external digital capabilities can assist companies in overcoming innovation challenges and enhancing their competitiveness in the online domain.
Developing capabilities is a crucial aspect of DX, with the specific variety of capacities varying across sectors and individual company needs. Digital capabilities positively impact digital innovation, thereby driving DX. Research demonstrates the positive influence of digital orientation and capacity on digital innovation and their mediating effects on financial and non-financial performance [24]. Digital innovation, in turn, acts as a mediator between digital capabilities and business performance, leading to improved resilience and organizational performance [25]. Companies prioritizing sustainable practices also tend to achieve better performance outcomes [20,21].
3. Dynamic Capabilities
Dynamic capabilities theory aims to explain the competitive advantage, with firm performance as a critical component. Dynamic capabilities refer to a firm’s ability to adapt and transform its ordinary capabilities or resource base, leading to changes in concert rather than explaining performance itself [24,26]. For that reason, dynamic capabilities have received significant attention in knowledge management. From a knowledge management perspective, firms must develop dynamic capabilities to effectively integrate and reconfigure internal and external knowledge in response to the ever-changing external environment. This adaptability and transformation is a potent source of competitive advantage for organizations [27].
Dynamic capabilities are a firm’s capacity to generate new knowledge by integrating and reconfiguring its resources [25]. This process enables firms to acquire new resources and expertise necessary for growth and development. Dynamic capabilities are crucial in managing knowledge while adapting strategies to address environmental changes.
The impact of dynamic capabilities extends to various aspects of a firm’s operations. They influence strategic performance by shaping resource allocation, operational routines, activities, knowledge development, transfer, and decision-making processes within a dynamic context. It is essential to note the close connection between dynamic capabilities and KM practices; as dynamic capabilities encompass a firm’s ability to reconfigure its KM practices effectively [27].
Facilitating the recombination of a firm’s resources and capabilities is one of the primary functions of dynamic capabilities. This recombination process enables the development of new knowledge, which, in turn, drives innovation in the form of new products or services. Additionally, dynamic capabilities empower firms to continuously solve problems and seize opportunities through timely and market-oriented decision-making [24].
MSMEs aiming for sustainable digitalization depend on dynamic capabilities as an essential requirement. These capabilities empower firms to adapt to changing circumstances, transform their operations, and leverage their knowledge to drive innovation, address challenges, and make well-informed decisions that align with market demands and opportunities.
4. Digital Transformation
DX represents a new opportunity for MSMEs, as it entails fundamental changes in business processes, operational routines, and organizational capabilities [28]. Its implementation is a deliberate and continuous evolution that involves strategic and tactical aspects, including entering new markets or exiting existing ones [29].
The impact of DX goes beyond individual companies; it has the potential to transform the entire business world and society as a whole through the establishment of new internet-based technologies [30]. As a result, DX has the potential to revolutionize traditional industries and bring significant changes in how value is created and delivered to customers [31].
DX is an evolutionary process that leverages digital technologies and capabilities to create value changing the business models, operational activities, and customer experiences [32]. Organizations can experience profound shifts in their functioning and ability to provide value-added services to customers by integrating digital technologies and new business models [33]. Enterprises can adopt various technologies, including big data, mobile devices, and social media [34]. These technologies enable MSMEs to achieve significant business improvements, such as enhancing the customer experience, streamlining operations, and creating innovative business models [23].
DX is a strategic decision that top management makes to enhance organizational competitiveness, optimize resource utilization, and improve operational processes [33,35]. In today’s globally competitive and economically challenging environment, effectively managing information, reducing operating costs, and analyzing real-time data have made DX increasingly significant [36,37]. As a result, organizations can achieve greater flexibility, cost savings, and improved decision-making capabilities.
DX differs from the traditional adoption of information and communication technologies (ICTs) as it impacts the business model and requires the support of at least one of the three methodologies of quality (Kaizen, Lean, or Six Sigma) [38,39,40]. Instead, the DX strategy concerns the adoption of ICTs in conjunction with a well-defined process, where the business model and quality management system (QMS) are the critical components for meeting customer expectations consistently [41,42,43,44].
A DX strategy is a crucial step for successful digital implementation at different points in an enterprise. The strategy should focus on changing the business philosophy [45,46,47]. Under this new paradigm, managers must understand their context, including situational opportunities and constraints that could impact economic growth, quality of working life, and production processes [41,48]. We can divide the context into internal and external components, with the former demanding special attention to costs and efforts for changing the business philosophy and the latter necessitating attention to economic, environmental, and political changes [43,44].
Adopting DX is crucial for MSMEs to stay competitive in today’s digital landscape. It allows them to leverage technology to optimize their operations, reach new customers, and deliver products and services in innovative ways. Under this situation, MSMEs can unlock new opportunities for growth, efficiency, and customer satisfaction. However, top managers of MSMEs need to approach DX strategically, considering their unique organizational capabilities and resources. They should identify the specific digital technologies and business models that align with their goals and target markets. Additionally, MSMEs should foster a culture of continuous learning and adaptation to ensure the sustainability of their DX efforts.
5. Micro-, Small-, and Medium-Sized Enterprises
According to the World Bank, MSMEs are classified based on their workforce size: micro enterprises employ 1–9 individuals, small enterprises employ 10–49 individuals, and medium enterprises employ 50–249 individuals [49]. However, the concept of MSMEs lacks a universally agreed-upon definition that can precisely outline its boundaries, primarily due to variations among countries, their economies, and the unique characteristics of their enterprises [50]. Nevertheless, a particular definition of MSMEs in each country considers the number of employees, turnover, and assets [51].
MSMEs are critical players in the broader entrepreneurial ecosystem. These companies are crucial in driving net job creation and fostering innovation and sustainability in the private sector. In emerging markets alone, there are approximately 365–445 million MSMEs, consisting of formal SMEs ranging from 25 to 30 million, formal micro enterprises ranging from 55 to 70 million, and a significant number of informal enterprises ranging from 285 to 345 million [49].
Globally, MSMEs have a representative contribution to production and employment, accounting for more than 90% of businesses. In low-income countries, MSMEs employ about 33% of formal sector workers, while in high-income countries, this figure rises to 62%. In countries with informal economies, the role of MSMEs in employment becomes even more prominent. For example, in India, a staggering 86% of the workforce is employed in the informal sector, which includes agriculture [52]. Although MSMEs are the most common type of business globally, their essential characteristics have yet to be widely understood. In general, MSMEs exhibit several common traits [53]:
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operate as independent entities separate from large enterprises;
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are typically established and managed by their owners, who face the associated risks;
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have a relatively small number of employees;
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have a limited range of products or services;
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have a modest market share and a small customer base; and
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help to access resources like funding, external advice, and government assistance.
Businesses of all sizes have been affected by the crisis. While large enterprises attract attention with their announcements of layoffs and substantial declines in sales and earnings, MSMEs also face challenges stemming from weakened demand, limited access to credit, and reduced orders from larger companies. As a result, small businesses across various sectors and organizational structures have experienced the impact [54].
Understanding how key capabilities contribute to the performance of MSMEs can provide valuable insights for enhancing their competitiveness [54,55]. Additionally, it is essential to identify the significance of human capital management for MSMEs and explore how the recruitment, development, and retention of skilled personnel affect their competitiveness, offering practical implications for fostering a capable workforce [56,57]. In this way, it is also relevant to examine how the participation of stakeholders can contribute to defining effective strategies for sustainability through DX [57].
6. Stakeholders
Stakeholders are those who have rights or interests in a system. For an organization, stakeholders are any group or individual who can affect or be affected by the achievement of the organization’s purpose [58]. Different articles in the literature aim to explore the importance of stakeholders for companies and the importance of aligning corporate policies with their interests [1,59,60,61,62,63,64]. Stakeholders are crucial in shaping companies’ success and long-term viability [60]. Therefore, understanding their interests and establishing effective relationships are essential for companies to operate socially responsible and economically viable [61]. According to Freeman and Reed, interested parties include individuals or groups that have a significant interest or connection to the organization, including citizens, customers, employees, governments, intergovernmental organizations, non-governmental organizations, policymakers, and suppliers, whose support is vital to the long-term viability of the organization [59].
Regarding organizational structure, the nature of stakeholder relationships differs between the public and private sectors [65]. Private companies often view the relationship as a contractual arrangement involving private owners, employees, and other entities [66]. Therefore, the collaboration between government leaders, the dedicated employees of the department leading the initiative, the internal IT departments, and the IT service providers should be harmonious and synergistic. This collective effort would ensure comprehensive stakeholder involvement, allowing for the successful implementation of digitalization projects [67]. The government leadership would provide visionary guidance, while the department employees would bring valuable insights and commitment. Supported by the expertise of internal IT departments, the technical aspects would be well-coordinated, with IT service providers contributing their specialized skills. This ideal collaboration among stakeholders would create a robust foundation for the effective delivery of sustainable digitalization [64].
For any company size, stakeholders serve as a valuable asset in designing, implementing, and evaluating proposals, such as policies, products, services, and strategies [63]. Stakeholders actively collaborate to identify and evaluate organizational activity, enabling informed decision-making and effective resource allocation [62]. The management team must prioritize the well-being of key stakeholders, when making decisions or implementing strategies [66], and more so during times of crisis because they can accelerate organizational recovery [59,66,68].
The relevance of stakeholders for MSMEs In adopting environmentally sustainable practices is becoming increasingly important [1]. With the rise of environmental problems on a global scale and the growing ecological awareness among stakeholders, MSMEs are expected to prioritize the environmental behavior of these critical stakeholders [65]. Stakeholders can exert pressure or encourage MSMEs, going beyond what is legally required, to promote environmentally responsible practices [62]. Therefore, their influence can play a significant role in shaping the environmental initiatives undertaken by MSMEs. One way stakeholders express their expectations is through the demand for environmental reporting. Stakeholder pressure leads companies, including MSMEs, to engage in ecological reporting to demonstrate their commitment to environmental responsibility [1]. It indicates that stakeholders’ concerns drive MSMEs’ adoption of environmentally responsible practices.
7. Sustainability through Digital Transformation
Advances in digital technologies, such as process automation, 3D printing, the Internet of Things, and robotics, have transformed the process of international enterprises and contributed to their sustainability, survival, and development in the global market.
In recent years, sustainability has emerged as a critical aspect of DX, exerting a remarkable influence across diverse economic sectors, including agriculture [10]. In the agricultural domain, organizations recognize the importance of prioritizing effective waste management, sustainable production practices, and pollution control, acknowledging their great significance [69]. Consequently, this transformative shift holds profound implications for organizational capabilities, performance, and the strategic orientation of MSMEs in their pursuit of environmental sustainability [70]. These findings underscore the multifaceted nature of sustainability through DX in any economic context and its potential to drive positive change at various levels.
The paradigm of sustainable DX must generate internal and external benefits for the company [20]. It should promote greater environmental, economic, human, and social responsibility through business practices. Sustainable processes based on ICT can help companies develop solutions that make a real difference in their reduction, reuse, and recycling policies, thus protecting business margins and costs [71]. Furthermore, companies can use ICT to innovate in business processes, deliver sustainability benefits to the entire company, and improve the quality of the working life of their employees [21].
8. Technology Absorptive Capacity
Achieving sustainable digital transformation in MSMEs relies on the crucial role of absorptive capacity. Absorptive capacity is the organization’s ability to search, acquire, and exploit external technology, as evidenced by its characteristics. It refers to their ability to acquire and effectively utilize external technology [72]. Numerous studies highlight the importance of absorptive capacity in enhancing performance and driving innovation in MSMEs [73]. It serves as the foundation for technical learning within organizations, allowing them to identify and exploit knowledge from the external environment [74].
The influence of organizational culture on technology is particularly relevant to MSMEs [75]. Organizational culture shapes employee interactions and job execution, either facilitating or hindering organizational change and learning [72]. Additionally, MSMEs’ interactions and connections with external organizations are vital for strengthening absorptive capacity and improving transfer performance [74].
For the long-term success of MSMEs, adopting sustainable DX is crucial, replacing outdated technologies, processes, and interactions with environmentally responsible alternatives. MSMEs can enhance technological capabilities and promote sustainable practices by incorporating external technologies and knowledge. Thus, fostering technological absorptive capacity is critical in enabling sustainable DX for MSMEs.
This entry is adapted from the peer-reviewed paper 10.3390/su151411221
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