Strategic Digital Transformation and Competitive Advantage: The Mediating Role of Innovation Capability

Abstract

This paper investigates how strategic digital transformation (DT) fosters competitive advantage (CA) in firms, and specifically whether innovation capability (IC) mediates this relationship. Drawing on the Resource-Based View (RBV) and Dynamic Capabilities perspectives, we develop and test a conceptual model where DT (measured as digital strategy, digital organization, and digital technology adoption) drives CA both directly and indirectly via IC (product, process, and business-model innovation capability). We simulate an empirical test using survey data from 320 firms (mixed manufacturing and service firms) and analyze the model with Partial Least Squares Structural Equation Modeling (PLS-SEM). Results (simulated) show a significant direct effect of DT → CA (β = .34, p < .001), a strong effect DT → IC (β = .57, p < .001), and IC → CA (β = .42, p < .001). Mediation analysis indicates a significant partial mediation: indirect effect DT → IC → CA = .24 (Sobel z ≈ 5.8, p < .001), with the total effect of DT on CA = .58. We discuss theoretical and managerial implications, limitations, and policy recommendations for firms and policymakers pursuing digital strategies that intentionally build innovation capabilities to translate digital investments into sustained competitive advantage.