Strategic Effects of Digital Transformation: Innovation Performance as a Pathway to Competitive Advantage

Abstract

Background: Digital transformation has become a central process in contemporary business environments, as organizations increasingly integrate advanced technologies into their operations and business models. While digital transformation is widely recognized as a driver of organizational change and innovation capacity, its direct effect on competitive advantage remains unclear, as the mechanisms through which digital investments translate into strategic outcomes are not yet fully understood.

Purpose: The aim of this research is to examine how digital transformation influences innovation and competitive advantage, and to assess whether innovation performance mediates this relationship.

Study design/methodology/approach: Data were collected through a structured survey in which 53 representatives of companies from Split, Croatia participated. The response rate was 31.2%. Empirical analysis was conducted using Partial Least Squares Structural Equation Modeling (PLS-SEM) to test the proposed relationships between digital transformation, innovation performance, and competitive advantage, which is particularly appropriate for small samples and exploratory research designs.

Findings/conclusions: The results indicate that digital transformation positively influences innovation performance, which in turn positively influences competitive advantage. Innovation performance fully mediates the relationship between digital transformation and competitive advantage, with the direct path becoming insignificant once the mediator is included. These findings suggest that digital transformation generates competitive advantage primarily through its capacity to enhance innovation performance, rather than through direct technological adoption.

Limitations/future research: The study is limited by a small convenience sample drawn from a single geographic area, which restricts generalizability. Future research should examine different institutional, sectoral and national contexts, incorporate objective performance measures, and apply longitudinal designs to better establish causality.