DYNAMIC CAPABILITY AND MSME BUSINESS PERFORMANCE: A CONCEPTUAL FRAMEWORK WITH DIGITAL TRANSFORMATION AND COMPETITIVE ADVANTAGE AS INTERVENING VARIABLES

Abstract

Micro, Small, and Medium Enterprises (MSMEs) face significant challenges in a volatile, technology-driven business environment. Although Dynamic Capability (DC) is recognised as a source of strategic advantage, the mechanism by which DC is translated into Business Performance (BP) through Digital Transformation (DT) and Competitive Advantage (CA) in the MSME context remains incompletely understood. This article aims to develop a conceptual framework integrating DC, DT, CA, and BP. Through a systematic literature review of publications from 2015–2025, this study proposes five main propositions: (1) DC positively affects DT; (2) DT positively affects CA; (3) DT mediates the relationship between DC and CA; (4) DC has a direct effect on CA; and (5) CA has a direct and positive effect on Business Performance (BP). This framework offers novelty by positioning DT and CA not merely as outcomes but as strategic transformation mechanisms that bridge organisational capabilities and ultimate market and financial performance. This synthesis helps MSME practitioners identify priority areas for developing dynamic capabilities to support effective digital transformation and sustainable business growth.