European Journal of Information Systems

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Business value of SME digitalisation: when does it

pay off more?

Nicolai Etienne Fabian, John Qi Dong, Thijs Broekhuizen & Peter C. Verhoef

To cite this article: Nicolai Etienne Fabian, John Qi Dong, Thijs Broekhuizen & Peter C. Verhoef
(09 Feb 2023): Business value of SME digitalisation: when does it pay off more?, European
Journal of Information Systems, DOI: 10.1080/0960085X.2023.2167671

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EUROPEAN JOURNAL OF INFORMATION SYSTEMS
https://doi.org/10.1080/0960085X.2023.2167671

Business value of SME digitalisation: when does it pay off more?

Nicolai Etienne Fabiana, John Qi Dong b
, Thijs Broekhuizena and Peter C. Verhoefa
a
Faculty of Economics and Business, University of Groningen, Groningen, The Netherlands; bNanyang Business School, Nanyang
Technological University, Singapore

ABSTRACT ARTICLE HISTORY

Small and medium enterprise (SME) digitalisation involves the reinforcement, modification, Received 15 July 2021
and renewal of business models with the help of digital technologies. It is widely considered Accepted 17 December 2022
imperative for SMEs to stay relevant in the digital age. Yet, little is known about the conditions KEYWORDS
under which SME digitalisation improves the performance of SMEs in the IS literature. Guided SME digitalisation; digital
by the SME literature, we postulate that the business value of SME digitalisation – based on its business models; digital
impact on improving financial firm performance – is dependent on two factors that are transformation; radical
particularly relevant to SMEs due to their smallness and flexibility: radical orientation and orientation; organisational
organisational rigidity. Using data from multiple waves of surveys in 2019–2020 and archival rigidity; business value of
financial data from Dutch SMEs, we demonstrate that the positive impact of SME digitalisation digitalisation
on performance improvement strongly depends on SME characteristics. SMEs who are oriented
towards radical change and are more rigid are disadvantaged and attain lower returns on SME
digitalisation.

1. Introduction
more than 90% of the firms in the European Union as
Small and medium enterprises (SMEs) increasingly well as 50% to 70% of the workforce (Müller et al.,
face challenges regarding the use of digital technolo­ 2018), it is highly important to shed light on the
gies (Cenamor et al., 2019; Soluk et al., 2021). Digital business value implications of SME digitalisation.
technologies such as big data analytics, artificial intel­ Especially to better understand inhibitors and enablers
ligence, cloud computing, and blockchain have of the relationship between SME digitalisation and
become ubiquitous and accessible to SMEs, allowing performance improvement.
them to optimise existing processes, enhance their This study responds to recent calls to investigate the
value proposition as well as improve customer experi­ enablers and inhibitors of SME digitalisation (Chan
ence (Ainin et al., 2015; Bouncken et al., 2021; Matt et al., 2019; Hanelt et al., 2021), including organisa­
et al., 2015). The resulting digitalisation of business tional culture (identity, leadership) and organisational
models (hereafter: SME digitalisation) is of vital barriers (inertia, resistance) (Chan et al., 2019;
importance to SMEs to stay relevant in the digital Proksch et al., 2021; Vial, 2019; Volberda et al.,
age (Benitez, Chen, et al., 2018; Fischer et al., 2020; 2018). In doing so, this paper integrates specific fac­
Kane et al., 2015; Sebastian et al., 2017). Thereby, SME tors from the SME context to explain the diverging
digitalisation concerns the degree of digital change performance outcomes of SME digitalisation, namely:
and ranges from the incremental use of digital tech­ radical orientation—that is, an SME’s cultural dimen­
nologies to reinforce existing business models sion that reflects the firm employees’ orientation
(Tumbas et al., 2018) to the development of entirely towards having ideas that differ substantially from
new business models, also known as business model existing practices and alternatives (Bala & Venkatesh,
renewal (Volberda et al., 2018) that uses digital tech­ 2013; Luo et al., 2012; Proksch et al., 2021; Vial, 2019),
nologies to deeply and thoroughly alter firms’ value and organisational rigidity—that is, an SME’s organi­
creation (Verhoef et al., 2021; Vial, 2019). sational barrier that reflects the firm’s inability to
While much research about digitalisation and digi­ adapt and innovate (Chan et al., 2019; Fan et al.,
tal transformation has been performed in the context 2020; Gilbert, 2005; Lucas & Goh, 2009; Polites &
of large incumbents (see Firk et al., 2021; Wang & Karahanna, 2012; Vial, 2019). Using data from multi­
Wang, 2020; Wessel et al., 2021), little is known ple waves of surveys in 2019–2020 and archival finan­
about its performance implications, i.e., how firms cial data from Dutch SMEs, we test whether a radical
reap financial benefits from SME digitalisation (Eller approach hampers the business value of digitalisation
et al., 2020; Li et al., 2018). With SMEs representing by impeding organisational learning as well as how

CONTACT John Qi Dong [email protected]

Supplemental data for this article can be accessed online at https://doi.org/10.1080/0960085X.2023.2167671.
© The Operational Research Society 2023.
2 N. E. FABIAN ET AL.

rigidity may limit the required flexibility to overcome change, data-driven business models, digitalisation,
path dependence and adjust routines for SMEs in and digital transformation,1 as exemplified by the
particular (Chan et al., 2019; Karhade & Dong, 2021b). multitude of recently published works (e.g., Hanelt
This study contributes to IS literature in three et al., 2021; Verhoef et al., 2021; Vial, 2019). Such
notable ways. First, we extend knowledge on the digital phenomena (e.g., Chanias et al., 2019; Gupta
degree to which SMEs derive financial value from & Bose, 2022; Li et al., 2018) often overlap and require
using digital technologies (Baiyere et al., 2020; Soluk researchers to clearly define their digital construct
& Kammerlander, 2021; Volberda et al., 2018). We (Verhoef et al., 2021). In this study, we focus on
specifically integrate knowledge on the context- SME digitalisation2 which focuses on business model
specific inhibitors for SME digitalisation (Hong et al., reinforcement, modification, and renewal with the
2014) and find that, against the promoted strategic help of digital technologies by SMEs (Baiyere et al.,
imperative to increase digitalisation efforts, the busi­ 2020; Soluk & Kammerlander, 2021; Volberda et al.,
ness value of SME digitalisation is hindered by an 2018). Current contentions in the digital transforma­
SME’s radical orientation and organisational rigidity tion literature are almost exclusively based on the
(Chan et al., 2019; Proksch et al., 2021; Soluk et al., investigation of larger incumbent companies (Hanelt
2021). We also contribute new insights about the role et al., 2021; Vial, 2019; Wessel et al., 2021) and often
of organisational factors that influence the business take a limited binary view (transformed vs. not trans­
value of IT for SME firms (Benitez, Castillo, et al., formed) which limits our understanding of SME digi­
2018; Benitez, Llorens, et al., 2018; Trang et al., talisation. First, popularised by its high potential,
2021). Second, from an empirical point of view, we many scholars and practitioners assume that digital
expand existing methods and evidence in the literature transformation is imperative for all firms (Baiyere
on the business value of SME digitalisation by com­ et al., 2020; Vial, 2019; Vom Brocke et al., 2021;
bining data from a multi-year survey and financial Wessel et al., 2021), thereby promoting a “the more,
data to increase the validity of the findings. Due to the better” mentality that recommends firms to
the unique characteristics of SMEs, most studies increase their digitalisation efforts and adopt
resorted to qualitative methods and thus lacked quan­ a variety of technologies to improve their business
titative insights into performance. Third and more performance. However, as explained by Eller et al.
broadly, our work also contributes to the literature (2020, p. 120): “the overwhelming majority of
on digital transformation. We question existing con­ resource-constrained SMEs are not equipped for this
tentions that treat digital transformation as a binary level of complexity”. The lack of specialised IT per­
outcome of transformed vs. not transformed (Vial, sonnel (Bouncken & Barwinski, 2020; Wee & Chua,
2019; Wessel et al., 2021). Instead, we use variance 2013), the integration of large quantities of digital
logic to theorise about the degree of change. Against technologies (Eller et al., 2020) as well as the complex­
the common contention that digital transformation ity of realising deep changes to organisational identity
requires radically new ideas (Baiyere et al., 2020; which are required for digital transformation (Wessel
Vial, 2019; Vom Brocke et al., 2021; Wessel et al., et al., 2021), are overwhelming for SMEs. Second,
2021), our study finds that such a radical orientation while digital transformation forms a process that
can limit the potential business value of SME digitali­ unfolds over time (e.g., Verhoef et al., 2021; Vial,
sation. Furthermore, incumbents may struggle with 2019), several studies take on a limited perspective
high rigidity from their established organisations to by assuming that firms are either digitally transformed
realise the potential business value of SME digitalisa­ or not (Gao et al., 2022; Libert et al., 2016). Thereby
tion. By incorporating these two important inhibiting ignoring the potential gains from undergoing changes
factors, we warn against the transformation impera­ by altering “some” elements of the underlying value-
tive of “the more the better” (Baiyere et al., 2020; Vial, creating structures as often occurs in the SME context.
2019; Vom Brocke et al., 2021; Wessel et al., 2021). We Hence, the current theory on digital transformation
provide initial findings that assumptions made for falls short of accounting for the context of smaller
larger firms may not always hold for smaller firms firms and regarding the measurement of SME digita­
and inform future theory development for digital lisation. Given these issues, it is important to integrate
transformation about the key role of organisational current research on business model digitalisation in
characteristics. the SME literature (Chan et al., 2019; Li et al., 2018;
Proksch et al., 2021; Soluk & Kammerlander, 2021;
Soluk et al., 2021).
2. Theoretical background Based on current definitions of digital transfor­
mation (Hanelt et al., 2021; Verhoef et al., 2021;
2.1. SME digitalisation
Vial, 2019; Wessel et al., 2021), we define SME
There is an increasing interest in the IS field in the digitalisation as the degree of change to the value-
implications of digital phenomena like IT-enabled creating structures of an SME rooted in the utilisation
 EUROPEAN JOURNAL OF INFORMATION SYSTEMS 3

of digital technologies. SMEs can realise high levels of may hamper (or foster) the degree to which SME
SME digitalisation when they use digital technology digitalisation results in performance improvement.
to strongly alter multiple value-creating structures
underlying their business model (Vial, 2019),
2.2. Enablers and inhibitors to benefit from SME
including changes to business operations, relation­
digitalisation
ship management, and strategic partnerships. For
SMEs, managing digital technologies to reinforce We draw on two contingency factors that reflect the
and upgrade existing or develop new business mod­ organisation’s culture and organisational barriers to
els has been considered a strategic imperative for implementing digitalisation and digital transforma­
future success (Benitez, Llorens, et al., 2018; tion (Vial, 2019): radical orientation (Bala &
Cannas, 2021; Soluk et al., 2021). SMEs differ sig­ Venkatesh, 2013; Luo et al., 2012; Osiyevskyy &
nificantly vis-à-vis larger organisations, as their Dewald, 2015; Proksch et al., 2021; Soluk et al., 2021)
smallness and flexibility may speed up the uptake and organisational rigidity (Bala & Venkatesh, 2013;
of new technologies improving the rate at which Chan et al., 2019). These two contingency factors are
they can innovate (Bouncken & Barwinski, 2020). key to understanding the business value of digitalisa­
At the extreme end of SME digitalisation, SMEs tion in the SME context, as they explain the conditions
use digital technologies to fundamentally alter and under which SME digitalisation converts into perfor­
renew their current business model by creating new mance improvement.
value-creating structures (Vial, 2019; Wessel et al., SME digitalisation may require a company culture
2021) that ultimately lead to new ways of capturing that is open and receptive to substantially new ideas
value; hence, extremely highly levels of SME digita­ because higher forms of SME digitalisation introduce
lisation likely change the business logic of the firm greater change and require that employees think in
and how it earns its money (e.g., Zott et al., 2011). novel ways that differ from existing practices (Vial,
At lower levels of digitalisation, SMEs may use new 2019). In an SME context, radical orientation plays an
digital technologies to replicate successful or further important role in determining whether SMEs benefit
improve existing parts of their business model by, from digitalisation, as there needs to be a willingness
for instance, realising efficiency gains or gaining to pursue the risky endeavour of SME digitalisation.
more control over business operations without alter­ The smaller size of SMEs and lack of slack resources
ing the business logic of the firm. make higher levels of SME digitalisation particularly
The potential business value of SME digitalisa­ risky. Consequently, SMEs with a higher radical orien­
tion derives from the degree to which SMEs can tation may feel a greater urgency to transform fast to
leverage and enhance their value-creating structures update (without much deliberation) their business
through the use of digital technologies by altering models in response to the advent of fast-changing
the firm’s value propositions (e.g., shifting from digital technologies and increased competition from
products to services by using data), value networks digital entrants (Soluk et al., 2021). Yet, the culture
(e.g., becoming a platform), and digital channels towards introducing substantially different ideas to the
(e.g., enhancing distribution, sales or logistics business may skip essential organisational learning
through digital technology). Ultimately, SME digi­ that is crucial to SME’s successful handling of digital
talisation alters the value creation and delivery to technologies (Bala & Venkatesh, 2013; Matarazzo
customers and the conversion of payments received et al., 2021; Proksch et al., 2021), such that SMEs
into profits (Teece, 2010). While recent studies with a strong radical orientation may miss out on the
have identified the antecedents of SME digitalisa­ advantages offered by more incremental, agile
tion (Agarwal et al., 2010; Chanias et al., 2019; approaches that facilitate organisational learning. In
Gupta & Bose, 2022; Li et al., 2018; Matarazzo their rush to the market, these SMEs may implement
et al., 2021; Proksch et al., 2021), much less is SME digitalisation too quickly and with inferior qual­
known about its performance implications, and in ity, which ultimately harms their performance.
particular, what factors explain why some firms are Moreover, given the limited resources of SMEs,
successful whereas others are not (see Table 1 for a strong radical orientation may easily require signifi­
an overview). A higher degree of SME digitalisation cant resources and shift attention away from their
does not uniformly guarantee performance gains traditional business, which may reduce their perfor­
for all SMEs as rigidity (Beliaeva et al., 2019; mance in their existing business.
Chan et al., 2019; Vial, 2019) and radical orienta­ Organisational rigidity is the second considered
tion (Bala & Venkatesh, 2013; Proksch et al., 2021; contingency factor (Bala & Venkatesh, 2013; Chan
Soluk et al., 2021; Vial, 2019) may act as context- et al., 2019). Compared with larger organisations,
specific inhibitors moderating the effect of SME SMEs are more flexible, which may promote their
digitalisation. Next, we explain how the two factors rate of innovation (Bouncken & Barwinski, 2020).
4 N. E. FABIAN ET AL.

Table 1. Studies on SME digitalisation.

Enablers
and
Study Focus Method (context) Empirical approaches and findings inhibitors
Cannas (2021) Drivers of dynamic Qualitative case study (Italy) A case study among 21 key respondents of Italian ❌
capabilities of SMEs SMEs in agrifood
involved in digital
transformation
Li et al. (2018) Drivers of digital Qualitative case study (China) Multiple case studies on 7 SMEs active on Alibaba’s ❌
transformation digital platform show the drivers of digital
transformation
Matarazzo et al. Digital transformation’s Qualitative case study (Italy) Multiple case studies on 6 Italian SMEs in the food, ❌
(2021) impact on customer fashion, and furniture design industries show that
value creation digital instruments contribute to business model
innovation
Chan et al. (2019) Agility as a response to Qualitative case study (China) The single-firm case study shows that boundary ✓
disruptive digital openness and adaptability help overcome rigidityOrganisational
innovation and promote the development of dynamic rigidity
capabilities
Soluk and Digital transformation in Qualitative case study (Germany) Multiple case studies to illustrate the digital business ❌
Kammerlander family-owned SMEs model changes in family firms
(2021)
Bouwman et al. Digitalisation on business Qualitative case study combined European SME survey combined with four in-depth ❌
(2018) model innovation with a quantitative survey cases to shed light on digitalisation with a specific
(European countries with 12 focus on the use of social media and big data on
languages) business model innovation and performance
Proksch et al. Digital strategy’s impact Quantitative survey within new A survey among 102 new ventures shows that the ✓
(2021) on the digitalisation of SME ventures (Germany) impact of digital strategy on the degree of Digital Culture
new ventures digitalisation is mediated by digital capabilities
and digital culture
Soluk et al. (2021) Family influence’s impact Quantitative survey on large SMEs A survey among 1444 German SMEs shows that the ✓
on digital business (Germany) positive effect of family influence is mediated by Dynamism
model innovation dynamic capabilities and that environmental
dynamism weakens the link between family
influence and dynamic capabilities
This study SME digitalisation’s Quantitative two-wave survey A multi-year survey of 293 (year 1) and 226 (year 2) ✓
influence on with archival data for smaller Dutch SMEs combined with financial data shows Radical
performance incumbent SMEs (Netherlands) that the effect of digital on firm performance orientation,
improvement improvement is attenuated by organisational organisational
rigidity and a radical orientation rigidity

However, their smaller size may limit the development et al., 2018; Benitez, Llorens, et al., 2018) because it
into new areas and promote rigidity by hindering the facilitates the effective transfer of ideas into digital
widespread adoption and use of digital technologies prototypes and innovations.
(Cenamor et al., 2019). Despite their nimbleness, over­
coming rigidity remains a key factor for SMEs to
3. Hypotheses development
benefit from the new opportunities presented by digi­
tal technologies (Chan et al., 2019; Eller et al., 2020). Figure 1 shows our research model that proposes that
A lack of organisational rigidity helps to create busi­ SME digitalisation is positively associated with perfor­
ness value from digitalisation (e.g., Benitez, Chen, mance improvement (H1) and that this positive

Radical orientation

H2: –
H1: +
SME digitalisation Performance improvement

H3: –

Organisational rigidity Control variables

Digital capabilities
Firm size
Firm age
Profit margin
Industry

Figure 1. Research model.

 EUROPEAN JOURNAL OF INFORMATION SYSTEMS 5

relationship is attenuated by radical orientation (H2) substantive change by having ideas that differ substan­
and organisational rigidity (H3). Below, we explain the tially from existing practices and alternatives (Bala &
associated hypotheses. Venkatesh, 2013; Luo et al., 2012). Research on digital
transformation (Osiyevskyy & Dewald, 2015; Proksch
et al., 2021; Soluk et al., 2021) suggests that the
3.1. SME digitalisation and performance
urgency created by digital disruption promotes firms
improvement
to develop radical approaches to change, but also that
Digital technologies enable changes in value-creating such radical orientations may inhibit organisational
structures that can alter or redefine the business model learning.
in various ways (Vial, 2019). First, firms can change Organisational learning is critical for SMEs to
the value propositions with the help of digital technol­ adopt new technologies (Matarazzo et al., 2021).
ogies, as shown by Netflix, which switched from rent­ Due to perceived urgency and the need for new
ing out physical videos to streaming and leveraging big digital technologies, SMEs may be pressured into
data to provide personalised recommendations to cus­ taking rapid action (Soluk et al., 2021). Thereby,
tomers (e.g., Dremel et al., 2020; Gomez-Uribe & the dynamism promoted by digital technologies
Hunt, 2015). Second, firms can change their value combined with urgency for change and SME culture
networks in response to digital technologies, resulting (Osiyevskyy & Dewald, 2015; Proksch et al., 2021)
in the use of digital platforms between different types may push firms towards more substantive and has­
of stakeholders to co-create value (e.g., De Reuver tily approaches of change. However, tensions result­
et al., 2018). Third, firms can change their use of ing from changes to the value-creating structures
digital channels by introducing new social media, (Vial, 2019) may create dysfunctional dynamics for
e-commerce, and m-commerce channels to better SME firms that lower firm performance. To effec­
interact with and serve customers (e.g., Suseno et al., tively address these tensions during transformation,
2018). In all of these instances, digital technologies recent studies point towards the necessity of a step-
enable changes in value-creating structures underlying by-step approach to change characterised by experi­
business models. mentation and incremental development of new
SME digitalisation allows firms to not only create knowledge through organisational learning from
value but also appropriate greater financial returns. success or failure in every step (e.g., Chanias et al.,
Digital technologies can help firms translate changes 2019; Verhoef et al., 2021; Visnjic et al., 2022).
in value-creating structures into increased revenues Hence, a firm’s radical orientation towards change
and subsequent profits. Digital business models are may play a key role in creating tensions stemming
more profitable because they require less labour, are from digitalisation, which can induce high
less dependent on physical infrastructure, have greater “dynamic adjustment costs” as hindrances to suc­
scalability, and lower distribution costs cessful business model innovation (Karhade &
(Constandinides et al., 2018; De Reuver et al., 2018; Dong, 2021a).
Verhoef et al., 2021). SME digitalisation may also To digitalise the business model in a value-
stimulate revenues and profits by entering new mar­ increasing manner, organisational learning from
kets and serving new customer segments (Wang et al., related experiences with digital technologies is critical
2018). Empirically, we expect to observe that higher (Chanias et al., 2019; Estrada & Dong, 2020). To
levels of SME digitalisation, on average, are positively reduce technological and market uncertainty, firms
associated with performance improvement. Hence, we need to rely on iterative experiments (Chanias et al.,
propose the following hypothesis: 2019; Karhade & Dong, 2021a). These experiments
can take different forms, such as the formation of
separate units outside the existing organisation (Sia
H1: SME digitalisation has a positive relationship et al., 2016), but also rely on newly formed teams
with performance improvement. operating within organisational structures and that
connect formerly unconnected departments and busi­
ness units (Dremel et al., 2017). Such experiments
minimise risk and guarantee the accumulation of
3.2. The moderating role of radical orientation
new (incremental) knowledge that can be used to
While we predict that SME digitalisation, on average, further improve the firm’s business model (Yeow
leads to performance improvement, we also predict et al., 2018).
that this impact varies according to the firm’s radical SMEs with a strong radical orientation have
orientation. An SME’s radical orientation is an impor­ employees who think in substantially different ways
tant cultural inhibitor (Proksch et al., 2021; Vial, that deviate from existing practices and that challenge
2019). We define radical orientation as the degree to the status quo (Bala & Venkatesh, 2013; Proksch et al.,
which a firm’s employees are oriented towards 2021). Such a culture does not align well with an
6 N. E. FABIAN ET AL.

iterative, step-by-step procedure for making incre­ ideas (Abraham & Junglas, 2011; McKeown & Philip,
mental changes but rather fosters a “waterfall” 2003). As the transformation of organisational rou­
approach that combines heavy upfront project design tines is fundamental to digital business models (Chan
with limited changes and performance feedback dur­ et al., 2019; Karhade & Dong, 2021b), firms must
ing and between project stages (Dong, 2021; remain open to new ideas and innovation (e.g.,
Mahadevan et al., 2015). A radical approach to change Lokuge et al., 2019; Quinton et al., 2018).
tends to interfere with existing business practices and Subsequently, organisational rigidity represents the
cause ambiguity and confusion to employees that may barriers to change that inhibit SME digitalisation due
subsequently harm performance (Bala & Venkatesh, to the difficulty of accommodating and translating
2013; Loebbecke & Picot, 2015; Sebastian et al., 2017; new ideas into concrete innovation (Chan et al.,
Wang et al., 2018). SMEs with a strong radical innova­ 2019). It leads to an absence of openness that subse­
tion orientation are less fit to learn from assessing quently leads to firms being stuck in established rou­
market needs (e.g., based on learning from product tines rather than developing new ones (e.g., Abraham
launches) and adjust their business model accordingly & Junglas, 2011; Chan et al., 2019; Lokuge et al., 2019).
to attain performance gains (Christensen et al., 2016). Rigid SMEs are less likely to question their beliefs
Given their limited experimentation and organisa­ and procedures related to business models (Quinton
tional learning, we hypothesise that SMEs with et al., 2018) and are less likely to learn from and incor­
a strong radical orientation approach benefit less porate new knowledge and update their routines (Alavi
from increased digitalisation efforts because they are et al., 2005; Karimi & Walter, 2015). Conversely, less
less effective in aligning and integrating digital tech­ rigid SMEs are more likely to challenge the established
nologies when updating their business models via business models, enabling the introduction of more
desirable means of value creation and appropriation. effective and efficient practices (Day & Schoemaker,
Hence, we expect that the positive relationship 2006; Quinton et al., 2018). Organisational rigidity can
between SME digitalisation and performance inhibit SME digitalisation because it harms the adop­
improvement will be weaker for firms with tion of new digital technologies, inhibits knowledge
a stronger radical orientation. sharing, and makes subsequent business model innova­
tion difficult (Teece, 2018). It undermines the firm’s
ability to adapt to changes and implement new routines
H2: Radical orientation weakens the positive rela­ needed for innovation. In firms characterised by high
tionship between SME digitalisation and performance organisational rigidity, employees tend to be less willing
improvement. to put effort into the new digital venture and rather
stick with the old business model (Karimi & Walter,
2015). Thus, organisational rigidity enhances path
dependency and makes business model innovation
3.3. The moderating role of organisational
more difficult and costly, thereby lowering the perfor­
rigidity
mance impact of SME digitalisation (Gilbert, 2005).
Organisational rigidity refers to the degree to which Hence, we hypothesise that the relationship between
a firm is unable to implement innovations (Bala & SME digitalisation and performance improvement will
Venkatesh, 2013; Chan et al., 2019; Lucas & Goh, be weaker for firms with greater organisational rigidity:
2009; Vial, 2019) and reflects a firm’s inertia to change
resulting from path dependence. For incumbent firms
that rely on long-established organisational routines H3: Organisational rigidity weakens the positive rela­
and processes, rigidity can make it extremely hard to tionship between SME digitalisation and performance
explore new ways of value creation and appropriation improvement.
(Gilbert, 2005). Employees may resist digital technol­
ogies and decide not to engage in changes or alter their
ways of working (Lapointe & Rivard, 2005). We argue
that firms with greater rigidity against changes in 4. Method
innovation activity may be disadvantaged at higher
4.1. Data collection
levels of SME digitalisation that require profound
changes to the value-creating mechanisms underlying To test our hypotheses, we relied on two waves of
SMEs’ business models. survey data collected in March 2019 and
High levels of SME digitalisation involve deep March 2020. The dataset of 2019 was used to test our
changes to the value-creating structures underlying main hypotheses, and the dataset of 2020 helped to
business models (Verhoef et al., 2021; Vial, 2019), in verify our findings. We had access to and could parti­
which organisational learning plays an integral part as cipate in a larger annual survey project that studies the
it facilitates the use of new knowledge and innovative business and innovation activities of SMEs in the
 EUROPEAN JOURNAL OF INFORMATION SYSTEMS 7

Table 2. Firm age distribution.

Sample (2019) Dutch SME population
Frequency Percentage Frequency Percentage
Less than 3 15 5% 5865 8%
3–5 22 7% 5860 8%
5–10 40 15% 15,915 21%
+10 202 73% 46,875 63%
Total 278 100% 74,355 100%

Netherlands. The first survey sampled about 5000 (t = 0.5484, p = 0.584), rigidity (t = −0.657, p = 0.512),
Dutch firms with a firm size below 500 employees and performance improvement (t = −0.916, p = 0.360).
and had an average response rate of 9%, covering The first wave of survey in 2019 that we used for
a variety of industries ranging from manufacturing, our main analysis yielded a total of 462 responses.
construction, IT, and retail sectors to public/non- After list-wise deletion, we obtained a net sample of
profit organisations. The lion’s share of respondents 175 observations. The sampled SMEs had, on aver­
(90.7%) was either an owner (26.1%), an executive age, 37 employees and were, on average, 3 years
manager (51.5%), or both (13.1%).3 old. In the second wave of survey in 2020, we
While survey research has inherent methodological again collected data for the dependent variable
limitations, our current setup provides two practical (i.e., performance improvement) and obtained
advantages. First, the decision power tends to be a total of 594 responses. By matching the two
rather concentrated in SMEs, which makes it relatively waves of survey based on firm identifiers, we
easy for key respondents, who play a major role in obtained 101 firms participating in both surveys
defining the firm’s digitalisation efforts, to track the that were used for robustness checks.
degree of digitalisation and adequately assess its per­ To assess the sample’s representativeness, we ana­
formance effects. In contrast to large multinational lysed our sample’s industry distribution using self-
corporations, where digitalisation activities might be reported sector codes and the official industry classifi­
heavily dispersed among multiple units and across cation as used by the Dutch Central Bureau of Statistics
geographical locations, the digitalisation efforts of (CBS). To make the industry classification consistent
SMEs tend to be more concentrated and localised, across these two independent sources, we grouped the
which makes it easier to capture possible digitalisation firms into four sectors, including 1) manufacturing, 2)
changes using survey-based approaches. retail and wholesale, 3) services and 4) public/non-
Second, by being part of a larger annual survey profit. Among the initial sample, only 271 SMEs
project, we reduced the possible self-selection bias reported about their industry. Tables 2–3 show that
because we did not address the purpose of SME digi­ our sample corresponds to the actual Dutch SME popu­
talisation upfront but asked SMEs about their business lation in terms of age. Our sample contains fewer self-
and innovation activities. To check for the potential employed firms (firms consisting of 1 person) than the
non-response bias, we compared the early and late population. Hence, our sample corresponds more
respondents (median split) in the 4-week period of strongly to the economic impact of SMEs. Table 4
data collection, but no statistically significant differ­ shows that our sample largely matches the Dutch SME
ences were found in firm size (t = −0.201, p = 0.841) population in terms of industry, yet the retail and
and firm age (t = −1.516, p = 0.131). We also did not wholesale are somewhat under-represented. Given our
find any significant mean differences between early focus on assessing the strength of associations instead of
and late respondents for our main construct of SME attaining population estimates, we consider the sample
digitalisation (t = 1.305, p = 0.192), radical orientation fitting for the purpose of our study.

Table 3. Firm size distribution.

Sample (2019) Dutch SME population
Frequency Percentage Frequency Percentage
1 63 23% 845,260 74%
2–10 91 33% 237,350 20%
11–50 86 30% 42,675 4%
51+ 38 14% 9205 1%
Total 278 100% 1,134,490 100%
8 N. E. FABIAN ET AL.

Table 4. Industry distribution.

Sample (2019) Dutch SME population
Frequency Percentage Frequency Percentage
Manufacturing 73 27% 319,370 27%
Retail and wholesale 48 19% 334,805 29%
Services 122 45% 516,210 44%
Public/nonprofit 28 9% n.a. n.a.
Total 271 100% 1,170,385 100%
n.a. = not available.

4.2. Measures responsibilities in the value system. In the second

phase, we invited academics who are knowledgeable
4.2.1. Independent variable
about digitalisation and digital transformation to
Given the lack of validated scales for SME digitalisa­
improve the wording and consistency of our items
tion, we followed recommended procedures for scale
(interrater reliability of 0.72). In the third phase, we
development and validation (MacKenzie et al., 2011).
conducted a pilot test for SME digitalisation to assess
In the first phase, we generated a pool of measurement
the reliability and face validity of our items. The values
items (Rossiter, 2002) based on a literature review and
for composite reliability and AVE were satisfactory
interviews with business practitioners and experts. We
and demonstrated predictive validity as it was posi­
conducted semi-structured interviews with managers
tively related to firm performance. In the final phase,
or owners of 11 SME firms. To identify key infor­
we selected six items to measure SME digitalisation
mants, we interviewed either the owner (for smaller
(see Table 5). All items were measured on a 5-point
firms) or the person responsible for digital technolo­
scale. We took the mean of these six items to calculate
gies (for medium-sized firms). Our interview was
a composite score where a higher score indicates
guided by the main question of what digitalisation
a higher degree of SME digitalisation.4
meant for their business. After conducting the inter­
views and scouting the literature (e.g., Parida et al.,
2019; Verhoef et al., 2021; Vial, 2019), we developed 4.2.2. Dependent variable
an initial list of items covering the elements of creating In line with Wang et al. (2012), we measured perfor­
novel offering configurations enabled by digital tech­ mance improvement based on two items asking about
nology, understanding customer needs concerning the additional revenue streams and efficiency gains
digital solutions, creating value through collaboration, realised with the help of digital technologies. These
adjusting operational processes, and revised roles and items measure both innovative (Svahn et al., 2017;

Table 5. Measurement items.

Loading
Construct Items (t-value) Scale Properties
SME digitalisation Digital technology has changed the way how we do 0.853*** 5-point scale: 1= not at Cronbach’s alpha = 0.874;
business (38.534) all, 5= to a great CR = 0.906;
Digital technology has changed our internal 0.713*** extent AVE = 0.617
operations (14.655)
Digital technology has changed the collaboration with 0.815***
partners (24.766)
The knowledge to use digital technology to improve 0.804***
the customer’s journey (analysing and collecting (24.674)
data)
We have entered new geographical markets and serve 0.739***
new customers with the help of digital technology (19.282)
Our role in the value system has changed (e.g., 0.776***
extending markets via online channels, entering (21.949)
new business fields)
Radical Our workers have groundbreaking ideas about new 0.900*** 5-point scale: 1= strongly Cronbach’s alpha = 0.887;
orientation procedures, processes, and products (9.386) disagree, 5= strongly CR = 0.920;
Our workers have pioneering ideas about practices 0.917*** agree AVE = 0.801
and routines (11.716)
Our workers have ideas to handle work in fully new 0.854***
ways (9.291)
Organisational We have difficulties to translate creative ideas into 0.809*** 4-point scale:1 = none, Cronbach’s alpha = 0.726;
rigidity concrete innovations (4.357) 2= low, 3= moderate, CR = 0.829;
We have difficulties to use innovative ideas in the 0.864*** 4= High AVE = 0.737
company (4.799)
Performance We have been able to create additional revenue with 0.854*** 5-point scale: 1= not at Cronbach’s alpha = 0.656;
improvement the help of digital technologies (28.312) all, 5= to a great CR = 0.853;
We have been able to realise operational benefits with 0.870*** extent AVE = 0.744
the help of digital technologies (45.380)
N = 175. CR = composite reliability; AVE = average variance extracted. All scale properties (standardised loadings, t-values, Cronbach’s alphas, CRs, and
AVEs) are based on PLS-SEM with 5000 times of bootstrapping.
 EUROPEAN JOURNAL OF INFORMATION SYSTEMS 9

Vial, 2019) and financial (Karimi & Walter, 2015) and use of digital technologies (Anand et al., 2020; Dong
dimensions of performance. By exclusively measuring et al., 2021). As there is a lack of archival performance
the performance improvement with the help of digital data for Dutch SMEs, we controlled for SMEs’ self-
technologies, we can alleviate the performance impact reported profit margin. Finally, we controlled industry-
of omitted variables that are not relevant to digitalisa­ fixed effects by including three dummies.
tion. For both items, we used a 5-point scale. We
decided to use a perceptual measure of performance
4.3. Assessment of measurement properties
because it is oftentimes very challenging to collect
objective and secondary data for SME firms. We used partial least squares structural equation mod­
Therefore, a subjective performance measure is an elling (PLS-SEM) to assess the measurement properties
appropriate measure for the research context.5 We of our five latent constructs (the independent and
also treat performance improvement as a composite dependent variables, moderators, and a control variable
construct because an improvement in revenues may digital capabilities) based on the final sample (N = 175).
not necessarily correspond with realising greater Following Benitez et al. (2020), we first evaluate the
operational benefits (Jarvis et al., 2003). We calculate overall fit of the saturated model to assess the validity of
a composite score based on the means of the two the measurement and the composite models. Our
items. Higher scores correspond to greater perfor­ SRMR value of 0.058 supports adequate model fit as
mance improvement. its value is below the .08 threshold. Furthermore, the
discrepancy measures dULS and dG are below the 95%
4.2.3. Moderators quantile of their reference distribution (HI95), finding
We measured radical orientation based on three items empirical support for our incorporated latent indepen­
to measure the firm’s employee’s orientation towards dent and dependent variables in the model.
having ideas that differ substantially from existing To assess the validity of the constructs, we find that all
practices. The items of Bala and Venkatesh (2013), our constructs demonstrate sufficient convergent validity
which refer to radical innovation, were adjusted to fit (see Table 5), as all item loadings are high and statistically
the new context. The items were measured on significant, and latent variables have an average variance
a 5-point scale, in which higher scores indicate extracted (AVE) above 0.5. Despite the high expected
a stronger radical orientation towards change. We correlations between the latent construct of SME digita­
measured organisational rigidity based on two items lisation with digital capabilities (r = 0.694) and between
regarding the difficulty of using innovative ideas and digital capabilities and digital performance (r = 0.716),
translating them into concrete solutions. The ques­ we found evidence for sufficient discriminant validity as
tions were also adapted from Bala and Venkatesh none of the correlations of our predictors (±2 standard
(2013). The items were measured on a 4-point scale, errors) include unity (Bagozzi & Yi, 1988). The
in which higher scores correspond to greater organi­ Heterotrait-Monotrait (HTMT) test revealed no appar­
sational rigidity against change. We again, calculate ent discriminant validity issues among our independent
a composite score for both variables. variables (highest ratio between SME digitalisation and
digital capabilities of 0.782). Yet, this test showed that
4.2.4. Control variables our independent variable of digital capabilities and the
We controlled several factors that may confound with dependent variable of digital performance has a value of
SME digitalisation and affect performance improve­ 0.928, which is higher than the threshold of 0.9, which
ment. First, we controlled for a firm’s digital capabilities can pint to discriminant problems (Henseler et al., 2015).
as it may directly influence SME digitalisation. Digital To reduce collinearity and reduce overlap between the
capabilities have been widely studied in the literature on constructs, we orthogonalised SME digitalisation and
the business value of IT, and we controlled for it by digital capabilities, which is a linear transformation
using six items measuring a firm’s capabilities to 1) widely used to reduce high correlation without biasing
utilise digital technologies, 2) analyse data and use hypothesis testing (e.g., Sine et al., 2006). After orthogo­
insights gained, 3) find the best digital technologies, 4) nalisation, we found that the square root of AVE exceeds
integrate digital technologies, 5) change business pro­ the correlations with all other constructs, suggesting
cesses, and 6) manage data ethically, again we use sufficient discriminant validity (Fornell & Larcker,
a composite score to measure the variable. Second, we 1981). Finally, we used composite scores for further
used the number of employees to control for firm size analysis.
(e.g., Rai et al., 2006), and took the natural logarithm to
reduce the skewness of this variable. Third, we con­
4.4. Assessment of common method bias
trolled firm age by the number of years of existence
(e.g., Karimi & Walter, 2015), and again took the natural We assess common method bias for bivariate
logarithm to normalise this variable. Fourth, the finan­ relationships6 in multiple ways. First, to safeguard
cial performance of a firm may drive its investment in against common method bias, we kept the
10 N. E. FABIAN ET AL.

Table 6. Descriptive statistics and correlations.

Mean SD (1) (2) (3) (4) (5) (6) (7)
(1) Performance improvement 2.926 1.050 0.863
(2) SME digitalisation 0.104 0.972 0.602*** 0.785
(3) Radical orientation 3.216 1.012 0.181* 0.152* 0.850
(4) Organisational rigidity 2.211 0.099 −0.153** −0.096 −0.312*** 0.885
(5) Digital capabilities 0.099 0.985 0.354*** −0.036 0.029 −0.011 0.809
(6) Firm size 2.858 1.210 0.126 −0.046 −0.068 0.188*** 0.059
(7) Firm age 3.037 0.998 −0.139 −0.178** −0.292*** 0.228*** 0.137 0.508***
(8) Profit margin 12.291 22.249 0.155** 0.024 −0.001 0.016 0.030 −0.183** 0.053
* p < 0.05; ** p < 0.01; *** p < 0.001. SME digitalisation and digital capabilities are orthogonalised. The square roots of AVE are on the diagonal based on
PLS-SEM. Correlations in bold are the proxies for CMV.

questionnaire relatively short to avoid that respon­ positive correlations between the two independent
dents shift from response accuracy to response speed sources for firm age (r = 0.675, p < 0.001) and firm
(Podsakoff et al., 2003) and used mixed scales (e.g., size (r = 0.820, p < 0.001), respectively, corroborating
5-point, 4-point, and binary, etc.) to limit acquies­ the accuracy of our data in the lack of common
cence effects (Lindell & Whitney, 2001). Table 6 sug­ method bias. Taken together, all the evidence jointly
gests that common method bias is not substantial, as suggests that common method bias is not a serious
we observe insignificant correlations (Podsakoff et al., issue for our data.
2003).
Second, we formally assess the potential common
method bias by Harman’s single factor test (Malhotra 5. Results
& Kim, 2006). For Harman’s single-factor test, using
5.1. Hypothesis testing
a principal component factor analysis, we found that
the first factor explains 39% of the variance, which is We tested our hypotheses based on ordinary least
below the common threshold of 50%. Furthermore, squares (OLS) regression analysis due to the small
using covariance-based structural equation modelling sample. To avoid multicollinearity, we mean-centred
(CB-SEM), we found that the model demonstrates SME digitalisation, radical orientation, and organisa­
poor fit (χ2/df = 6.212; GFI = 0.645; CFI = 0.641; tional rigidity and then calculated their interaction
RMSEA = 0.159). terms. We checked the variance inflation factor
Third, we followed Lindell and Whitney (2001) (VIF) and found that multicollinearity is not a major
using the smallest (r = 0.016) and second smallest (r concern (mean VIF = 1.560, maximum VIF = 2.530).
= 0.024) positive correlations as the proxies for com­ Table 7 reports the OLS regression results for
mon method variance (CMV). We found that all par­ hypothesis testing. As suggested by H1, we found
tial correlations remained statistically significant. a significant and positive relationship between SME
Furthermore, using CB-SEM, we constructed digitalisation and performance improvement (β =
a measurement model including a common latent 0.686, p < 0.001, see Model 2) in support of H1. To
factor (Podsakoff et al., 2003). Following the work of test the moderating effects as proposed in H2 and H3,
Liang et al. (2007), we found that none of the 19 we estimated a full model with moderators and their
estimated paths from the common latent factor to interaction terms to predict SME digitalisation (see
each indicator was statistically significant, while all Model 3). SME digitalisation remained to have
19 estimated paths to their intended construct a positive relationship with performance improvement
remained statistically significant. The five latent con­ (β = 1.422, p < 0.001). We found a statistically signifi­
structs (59.15%) explained much more variance than cant and negative interaction effect between SME digi­
the variance explained by the common latent factor talisation and radical orientation on performance
(2.60%). In a subsequent step, we also assessed improvement (β = −0.142, p < 0.01), in support of H2.
a structural model to assess whether the effect of The interaction term between SME digitalisation and
SME digitalisation on performance improvement organisational rigidity is statistically significant and
holds while adjusting for CMV. The structural model negative (β = −0.137, p < 0.05), in support of H3.
showed that the effect of SME digitalisation reduced To facilitate the interpretation of the interaction
slightly but remained statistically significant (β = effects, we plot them and perform a simply slope test
0.418, p < 0.001 vs. β = 0.312, p < 0.05). (see Figures 2–3). We found that the positive relation­
Finally, we collected additional data from inde­ ship between SME digitalisation on performance
pendent sources to cross-validate our self-reported improvement is less steep at a higher level of radical
survey data. For firm age and size, we were able to orientation (high radical orientation: β = 1.280, p <
collect archival data for a small sample (around 10%) 0.001; low radical orientation: β = 1.564, p < 0.001).
based on filings from the Dutch Chamber of We also found that the positive relationship between
Commerce. We found statistically significant and SME digitalisation and performance improvement is
 EUROPEAN JOURNAL OF INFORMATION SYSTEMS 11

Table 7. OLS regression results for hypothesis testing.

(1) (2) (3)
SME digitalisation (H1: +) 0.686*** 1.422***
(0.059) (0.245)
SME digitalisation × −0.142**
Radical orientation (H2: –) (0.054)
SME digitalisation × −0.137*
Organisational rigidity (H3: –) (0.063)
Radical orientation 0.112 0.028 0.055
(0.084) (0.060) (0.060)
Organisational rigidity −0.082 −0.099 −0.070
(0.083) (0.060) (0.062)
Digital capabilities 0.400*** 0.425*** 0.411***
(0.075) (0.056) (0.055)
Firm size −0.036 −0.065 −0.069
(0.068) (0.052) (0.051)
Firm age −0.200 −0.048 0.033
(0.100) (0.068) (0.067)
Profit margin 0.005 0.002 0.000
(0.003) (0.003) (0.003)
Industry dummies Yes Yes Yes
Constant 3.000*** 3.391*** 3.267***
(0.530) (0.396) (0.395)
R2 0.213 0.566 0.590
Adj. R2 0.170 0.540 0.560
R2 change 0.353 0.024
F 4.960*** 21.370*** 19.420***
AIC 490.965 388.903 382.898
BIC 522.612 423.716 424.040
N = 175. * p < 0.05; ** p < 0.01; *** p < 0.001. Standard errors are in parentheses. The dependent
variable is performance improvement in 2019.

less steep at a higher level of organisational rigidity collecting data on profitability (only 13 firms provided
(high organisational rigidity: β = 1.285, p < 0.001; low an income statement). Nonetheless, we obtained one
organisational rigidity: β = 1.559, p < 0.001). Thus, the solvency ratio from the balance sheet, namely, “equity/
interaction plots show patterns in support of H2 total assets” in the following year 2020 for a smaller
and H3. sample of 106 firms. The equity-to-asset ratio is com­
monly utilised to predict firm failure (Beaver, 1966), in
which higher values represent that a firm has a greater
5.2. Robustness checks share of assets relative to its liabilities. We consider
5.2.1. Alternative dependent variable (archival this a suitable intermediate performance indicator to
data) assess our research model.
In addition to the survey-based measure, we collected The results reported in Table 8, confirmed
archival data from the Dutch Chamber of Commerce. a positive relationship between SME digitalisation
As SMEs in the Netherlands (less than 50 employees and our alternative dependent variable (β = 1.454, p
and less than €12 million in revenue per year) are not < 0.01), as well as the negative moderating effects of
required to publish financial information (e.g., income radical orientation (β = −0.299, p < 0.05), and of orga­
statement or cash flow), we faced difficulty in nisational rigidity (β = −0.290, p < 0.05). Therefore,

4.5
Performance improvement

4
Low radical
3.5
orientation
3
High radical
orientation
2.5

1.5

1
Low SME digitalisation High SME digitalisation

Figure 2. Performance impact of SME digitalisation at varying levels of radical orientation.

12 N. E. FABIAN ET AL.

4.5

Performance improvement
Low
3.5 organisational
rigidity
3
High
2.5 organisational
rigidity
2

1.5

1
Low SME digitalisation High SME digitalisation

Figure 3. Performance impact of SME digitalisation at varying levels of organisational rigidity.

our findings also hold for using an alternative depen­ relationship between SME digitalisation and our alter­
dent variable from archival data. native measure of performance improvement (β =
0.143, p < 0.001), and the negative moderating effects
5.2.2. Alternative dependent variable (survey data) of radical orientation (β = −0.047, p < 0.05), and of
As a second robustness check, we used an alternative organisational rigidity (β = −0.046, p = 0.090) that is
measure for performance improvement to examine marginally significant. Therefore, our findings also
the robustness of our findings. Following recent IS hold when using an alternative measure for perfor­
literature, we examined the performance impact of mance improvement.
SME digitalisation in terms of innovation performance
(Karhade & Dong, 2021a; Trantopoulos et al., 2017) 5.2.3. Time lag
instead of financial performance. We measured inno­ To overcome the cross-sectional nature of single sur­
vation performance improvement alternatively based veys, and in addition to the archival data, we have
on three questions: (1) improvement in processes of collected. We used data from the subsequent wave of
goods and services, (2) improvement in logistics, and the survey in 2020 and assessed the lagged effect of
(3) improvement in distribution. The results reported SME digitalisation, using the same performance
in Appendix A, Table A1, confirmed the positive improvement measured in 2020. The time lag also

Table 8. Results for alternative measure of performance improvement (archival data).

(1) (2) (3)
SME digitalisation −0.095 1.454**
(0.102) (0.530)
SME digitalisation × Radical orientation −0.299*
(0.115)
SME digitalisation × Organisational rigidity −0.290*
(0.119)
Radical orientation −0.284* −0.278* −0.286*
(0.117) (0.117) (0.116)
Organisational rigidity −0.244* −0.250* −0.227*
(0.114) (0.114) (0.110)
Digital capabilities −0.104 −0.107 −0.131
(0.094) (0.094) (0.092)
Firm size 0.114 0.308 0.365
(0.097) (0.228) (0.221)
Firm age 0.078 0.126 0.143
(0.115) (0.272) (0.266)
Profit margin 0.002 0.001 −0.001
(0.005) (0.005) (0.005)
Industry dummies Yes Yes Yes
Constant 1.404 1.380 1.475
(0.748) (0.749) (0.749)
R2 0.134 0.136 0.212
Adj. R2 0.128 0.045 0.110
R2 change 0.002 0.076
F 1.500 1.500 2.080**
AIC 294.576 295.623 289.908
BIC 321.210 324.920 324.532
N = 106. * p < 0.05; ** p < 0.01; *** p < 0.001. Standard errors are in parentheses. The dependent variable is
solvency ratio in 2020.
 EUROPEAN JOURNAL OF INFORMATION SYSTEMS 13

helped to rule out reverse causality. Due to the rela­ otherwise. In the first stage, we estimated a probit
tively small matched sample with only 101 firms model regressing this new dummy variable on an
across two waves of the survey, and after removing exclusive restriction as a digital specialist, a binary
missing values, we were left with a rather small sample variable indicating if the SME had a digital specialist
of 51 observations. While we did find a positive and who is responsible for digital strategy related to data,
significant effect for the direct relationship for perfor­ technology, and digitalisation (0 = no, 1 = yes), and
mance improvement in 2020 (β = 0.657, p < 0.01) as our moderators and control variables. Prior literature
well as innovation performance in 2020 (β = 0.127, p < suggests that digital specialist plays a key role in lead­
0.05), we did not find support for the moderation ing digitalisation (Eden et al., 2019; Hess et al., 2016).
effect. The small sample size may explain the inability The probit model demonstrated a good fit (see Table
to detect the more complex moderation relationship. A4, Appendix A). The inverse Mills ratio (IMR),
The results are reported in Appendix A, Table A2. which represents the propensity of SME digitalisation
being endogenously determined, was not statistically
5.2.4. Alternative model specification significant (β = −0.351, p = 0.384), which suggested the
We assessed the robustness of our findings using an absence of endogeneity. After controlling for the IMR,
alternative specification of our model. As research the main and moderating effects remained consistent
highlighted the possibilities of nonlinear relationships with our OLS results.
due to curvilinearity (Haans et al., 2016; Kohtamäki
et al., 2020) or synergies between related concepts such
as SME digitalisation and digital capabilities 6. Discussion and conclusion
(Nambisan et al., 2019; Witschel et al., 2019), we tested
6.1. Theoretical implications and contributions
for these possibilities but neither find evidence for
nonlinearity (the quadratic term of SME digitalisation First, this study contributes to existing research on the
is not statistically significant: β = −0.035, p = 0.461) business value of SME digitalisation by extending our
nor for the interaction effect between SME digitalisa­ knowledge of the degree to which SMEs derive value
tion and capabilities (the interaction term is not sta­ from using digital technologies for reinforcing, mod­
tistically significant: β = −0.186, p = 0.731). ifying, and renewing their business model (Baiyere
Furthermore, to ensure that the insertion of digital et al., 2020; Soluk & Kammerlander, 2021; Volberda
capabilities, which is highly correlated with SME digi­ et al., 2018). In response to calls, we integrate knowl­
talisation, did not distort our findings, we tested edge of the context-specific inhibitors for SME digita­
a model without digital capabilities. The results lisation (Chan et al., 2019; Hong et al., 2014; Proksch
reported in Appendix A, Table A3, were qualitatively et al., 2021). While our study provides important
the same: the effect of SME digitalisation on perfor­ insights into the, on average, positive business value
mance improvement (β = 0.645, p < 0.001) remained of digitalisation for SMEs, we find that heterogeneity
statistically significant and positive, and negative exists in the performance outcomes and that the busi­
interaction effects are found for radical orientation ness value of SME digitalisation can be severely hin­
(β = −0.183, p < 0.01) and organisational rigidity (β = dered by an SME’s radical orientation and
−0.142, p = 0.055). Hence, our findings were not dis­ organisational rigidity. By demonstrating the moder­
torted by the inclusion or exclusion of digital capabil­ ating effect of the contingency factors, we contribute
ities in the model. to our understanding of the organisational factors that
influence the business value of IT for SME firms
5.2.5. Endogeneity (Benitez, Castillo, et al., 2018; Benitez, Llorens, et al.,
In the presence of endogeneity (caused by simultane­ 2018; Trang et al., 2021).
ity), OLS can produce biased and inconsistent para­ While more pervasive forms of SME digitalisation
meter estimates. SMEs with better performance may like digital transformation are connected to radical
have more financial resources available for digitalisa­ changes in the fabric and identity of the organisation
tion, which could question the causality between SME (Wessel et al., 2021), we find that having an organisa­
digitalisation and performance improvement. tion culture that is supportive of such radical ideas
Omitted variables may also simultaneously affect (Bala & Venkatesh, 2013; Proksch et al., 2021; Vial,
SME digitalisation and performance improvement, 2019) limits the potential business value of SME digi­
leading to a spurious correlation. To further examine talisation due to lower levels of organisational learn­
the endogeneity concern, we used the two-stage ing. Our study also has implications for how digital
Heckman model. Following prior studies (e.g., transformation should be managed. The inhibiting
Bharadwaj et al., 2007; Dong et al., 2017), we took role of radical orientation may seem counterintuitive,
the median of SME digitalisation in our sample and given that substantive changes are required for the
created a dummy variable indicating 1 if the SME’s organisation. Yet, the finding makes sense given the
digitalisation score is greater than the median, and 0 importance of organisational learning and the
14 N. E. FABIAN ET AL.

emergent nature of digital transformation in which study shows that the findings of these studies may not
firms learn by running small and incremental experi­ hold in an SME context and that additional research is
ments that help to test the market assumptions that wanted to understand the business value of SME digi­
firms have (McGrath, 2010; Orlikowski, 1996). The talisation. Furthermore, while existing studies treat
dynamic nature of digitalisation, paired with the per­ digital transformation as a binary outcome, our study
ceived urgency to change (Soluk et al., 2021), may uses a variance logic that allows for a more fine-
pressure SMEs with high radical orientation to rush grained understanding of changing the value-
digitalisation. This radical orientation may contribute creating structures to some degree (i.e., SME digitali­
to undesirable outcomes of SME digitalisation because sation). By incorporating two important contingency
it foregoes step-by-step experimentation and learning factors, we show that SME digitalisation does not pay
(Karhade & Dong, 2021a). off for all SMEs and warn against the transformation
Furthermore, we find that firms that are rigid in imperative of “the more the better” (Baiyere et al.,
implementing ideas into innovation also benefit less 2020; Vial, 2019; Vom Brocke et al., 2021; Wessel
from increased digitalisation efforts. The complexity et al., 2021). We infer that organisational learning –
of changes to the value-creating structures introduced derived from test-and-learn iterations with incremen­
by digital technologies can often be overwhelming tal improvements – plays a crucial factor for SMEs in
(Eller et al., 2020). Due to their size, lack of resources explaining how those firms develop competences to
and competencies, and the concomitant survival risks handle digital technologies (Matarazzo et al., 2021;
of implementing digital transformation, SMEs may Proksch et al., 2021; Soluk et al., 2021). Thereby, we
suffer from inertia that hampers the successful deploy­ shed light on the importance of organisational factors.
ment of SME digitalisation (Cenamor et al., 2019; In sum, our study provides attention to current theo­
Chan et al., 2019). Our findings corroborate that as retical blind spots in the broader digital transforma­
we find that SMEs face difficulties in overcoming tion discourse and helps to increase our
established routines in favour of new ones, which in understanding of when SMEs can derive business
turn decreases the business value of digitalisation. value from their digitalisation efforts.
Moreover, we emphasise the findings of earlier studies
that stress the importance of organisational flexibility,
6.2. Managerial implications
an important factor in creating business value from
digitalisation (e.g., Benitez, Chen, et al., 2018; Benitez, Our study offers SME managers important guidance
Llorens, et al., 2018). when being confronted with the need to digitalise and
Second, from an empirical point of view, we expand transform their ventures. We show evidence that SME
existing methods and evidence in the literature on the digitalisation is beneficial for SME firms and while
business value of SME digitalisation by combining risky, it is well worth the effort. Thus, SME firms
data from a multi-year survey and financial data to should also aim to transform digitally, as it increases
increase the generalisability of the findings. While their business performance. In an increasingly digital
prior research focused either on larger SMEs (see world, abstaining from investments in digital technol­
Table 1) and excluded firms under 50 employees ogies and the transformation of business processes is
(e.g., Soluk et al., 2021), or new ventures (Proksch not a wise strategy for SMEs. This challenge is becom­
et al., 2021), less is known about the digitalisation ing even more important as large enterprises invest
efforts within incumbent micro- and small-sized heavily in digital transformation, and create hyper­
enterprises. With these smaller SMEs representing competitive environments (Troise et al., 2022). To
a significant share of the overall SME firms (e.g., 90% respond to this challenge, SME managers should
of SMEs within the Netherlands, according to the look beyond the binary classification of digitally trans­
Dutch central Bureau of Statistics), our study contri­ formed versus not transformed. Digital change is
butes important insights into the role of digitalisation about the degree of change and thereby covers
for smaller incumbent SMEs. Moreover, due to the a wider range of possibilities. SME managers can gra­
unique characteristics of (smaller) SMEs, most studies dually shift from being less digital to more digital, with
resorted to qualitative methods and thus lacked quan­ investing in specific technologies also depending on
titative insights into performance (see Table 1). Our their starting situation. While such a task may seem
combination of multi-year survey and objective finan­ daunting to SMEs, not every SME has to become the
cial data may help to overcome some of the inherent next Amazon, Uber, or Netflix. Our study shows evi­
weaknesses of cross-sectional survey studies and struc­ dence that SMEs can improve their performance by
turally assess the contingencies for a so-far neglected moving through different degrees of SME
set of SMEs. digitalisation.
Third, our study also contributes to the literature Our study also stresses the importance of organisa­
on digital transformation. While current inquiries into tional characteristics and how they function as impor­
digital transformation focus on larger legacy firms, our tant contingencies for the business value of SME
 EUROPEAN JOURNAL OF INFORMATION SYSTEMS 15

digitalisation. Managers should, for instance, be aware metrics as well to enhance our empirical measure­
of the necessity of organisational learning before reap­ ments. We believe that our design has merits because
ing the benefits of digitalisation. As radical orientation it allows for fine-grained insights into the nature of
inhibits the performance impact of digitalisation, digitalisation of smaller SMEs on a sample where
managers are recommended to treat digitalisation, secondary data is generally hard to come by.
not as an overnight revolution in which they sprint Second, although digitalisation is purposefully con­
to their strategic goals. SMEs with a strong radical ceptualised and measured in a broad manner to be
orientation towards change should be wary of their applicable across industries, our approach may ignore
lower ability to realise performance improvement distinct industry contexts and their implications for
from their digitalisation efforts. A recommended SME digitalisation. While we controlled for industry-
approach would be to develop an organisational cul­ fixed effects in our study, we have not specifically
ture focused on experimentation. Through the use of focused on whether SME digitalisation and perfor­
small-scale experiments, and installing mechanisms to mance should be measured differently and/or has dif­
learn from each step instead of making drastic ferent effects across industries. Thus, future research
changes, SMEs can learn over time from the imple­ may refine our approach and further explore SME
mentation of these changes. Moreover, the financial digitalisation’s contingencies by examining the robust­
and organisational investments in such smaller ness of our findings for specific industries. For
changes reduce the risk of digital transformation instance, in line with this argument, future research
initiatives (McGrath, 2010). can hypothesise and test specific moderators that play
Our study also reminds managers about the crucial different roles across industry contexts.
inhibiting role of rigidity to change. Organisations Third, our sample is limited by its scope on
with high rigidity face greater difficulties to implement Dutch SMEs. Future research could expand the
creative ideas, which hinder the business value of generalisability to other types of firms (different
digitalisation. Rigid organisations should be cautious types of SMEs or larger corporations), and that
and invest in agility to improve their returns on digi­ are active in other countries where digitalisation
talisation when they simultaneously resolve inertia may have different strategic importance and per­
and resistance to change. SMEs can become more formance outcomes. Lastly, our study integrates
agile by investing in strategic planning (building knowledge from both the digitalisation of SME
responsiveness to external developments) and in tech­ literature and the digital transformation literature.
nology and expertise (building infrastructure and We especially urge future research to better con­
attracting digital-savvy staff) (Troise et al., 2022). In sider the role of firm characteristics when building
so-called VUCA (volatility, uncertainty, complexity, theory about digital transformation.
and ambiguity) environments that are characterised
by strong dynamics (i.e., technological leaps, the
7. Conclusion
COVID-19 pandemic), this is even more important.
In sum, our study helps managers to develop By taking an SME perspective, this study conceptua­
a business case for engaging in digitalisation! lises and operationalises the construct of SME digita­
However, it also warns of a strong radical orientation lisation. Based on data from multiple waves of surveys
and an organisational rigid organisation when and archival data, we shed light on how SME digitali­
improving digitalisation. sation impacts firm performance and provide timely
insights into the business value of digitalisation. We
identify two contingency factors that explain why
6.3. Limitations and future research
digitalisation initiatives within SMEs may not always
Despite the merits, this study also has certain limita­ meet strategic goals to improve performance. We hope
tions and provides avenues for future research. First, that our research incentivises other scholars to further
this study uses mainly self-reported survey data from explore the idiosyncrasies of digitalisation that help to
a common source. Although we tried to minimise better understand the business value of digitalisation.
biases in data collection and improve reliability by
using multiple waves of surveys and collecting archival
data, some methodological concerns remain. While we
Notes
do not find that response bias, common method bias, 1. In defining digital transformation, we follow the lit­
or endogeneity harmed our results, we cannot fully erature (Hanelt et al., 2021; Verhoef et al., 2021; Vial,
rule out these concerns. Future studies are recom­ 2019; Wessel et al., 2021) and define it as the change
caused by the introduction of digital technologies to
mended to collect longitudinal data from multiple
the value-creating structures and organisational iden­
sources to overcome issues inherent to our research tity of the organisation.
design. Ideally, we would have had access to secondary 2. In this study, we investigate digitalisation at the orga­
data for more profit- or growth-driven performance nisational level (e.g., Baiyere et al., 2020; Morton et al.,
16 N. E. FABIAN ET AL.

2020; Singh et al., 2020; Vial, 2019), while profound Alavi, M., Kayworth, T. R., & Leidner, D. (2005). An empiri­
digital changes may also occur at the individual level cal examination of the influence of organizational culture
(e.g., Baptista et al., 2020), ecosystem level (e.g., Tan on knowledge management practices. Journal of
et al., 2020), industry level (e.g., Karimi & Walter, Management Information Systems, 22(3), 191–224.
2015; Lanamäki et al., 2020), or societal level (e.g., https://doi.org/10.2753/MIS0742-1222220307
Dengler & Matthes, 2018). Anand, A., Sharma, R., & Kohli, R. (2020). The effects of
3. We assessed whether systematic differences exist in operational and financial performance failure on
the perceptions of SME digitalisation across respon­ BI&A-enabled search behaviors: A theory of perfor­
dent groups based on functional roles, but indepen­ mance-driven search. Information Systems Research, 31
dent sample t-tests between the four groups (owners, (4), 1144–1163. https://doi.org/10.1287/isre.2020.0936
executive managers, both, and others) show no statis­ Bagozzi, R. P., & Yi, Y. (1988). On the evaluation of struc­
tically significant differences (p > 0.05) across the dif­ tural equation models. Journal of the Academy of
ferent types of respondents. Marketing Science, 16(1), 74–94. https://doi.org/10.1007/
4. We treat all our constructs as formative/composite BF02723327
because our items determine the latent variable Baiyere, A., Salmela, H., & Tapanainen, T. (2020). Digital
instead of the other way around. For example, for transformation and the new logics of business process
SME digitalisation, altering a component of the busi­ management. European Journal of Information Systems,
ness model does not necessarily covary with changing 29(3), 238–259. https://doi.org/10.1080/0960085X.2020.
another digital component (Jarvis et al., 2003). We 1718007
believe that all relevant aspects of SME digitalisation Bala, H., & Venkatesh, V. (2013). Changes in employees’ job
were covered by our items, and that it is unlikely that characteristics during an enterprise system implementa­
we misconstrue SME digitalisation construct through tion: A latent growth modeling perspective. MIS
the omission of important aspects, because there is Quarterly, 37(4), 1113–1140. https://doi.org/10.25300/
a strong overlap between our business model compo­ MISQ/2013/37.4.06
nents and those used in other studies (e.g., Parida Baptista, J., Stein, M. K., Klein, S., Watson-Manheim, M. B.,
et al., 2019). For other constructs, we apply a similar & Lee, J. (2020). Digital work and organizational trans­
reasoning and treat them as formative/composite. formation: Emergent Digital/Human work configura­
5. In a robustness check, we augmented our survey data tions in modern organizations. Journal of Strategic
with archival financial data for equity-to-asset ratio, Information Systems, 29(2), 101618. https://doi.org/10.
which generated consistent results. 1016/j.jsis.2020.101618
6. While common method bias can potentially inflate Beaver, W. H. (1966). Financial ratios as predictors of
correlations for bivariate relationships, it attenuates failure. Journal of Accounting Research, 4(3), 71–111.
the significance of interaction terms and cannot arti­ https://doi.org/10.2307/2490171
ficially create statistically significant interaction Beliaeva, T., Ferasso, M., Kraus, S., & Damke, E. J. (2019).
effects (Siemsen et al., 2010). Finding statistically sig­ Dynamics of digital entrepreneurship and the innovation
nificant interaction effects, “despite the influence of ecosystem. International Journal of Entrepreneurial
CMV in the data set should be taken as strong evi­ Behavior & Research, 26(2), 266–284. https://doi.org/10.
dence that an interaction effect exists.” (p. 470). 1108/IJEBR-06-2019-0397
Benitez, J., Castillo, A., Llorens, J., & Braojos, J. (2018). IT-
enabled knowledge ambidexterity and innovation perfor­
Disclosure statement mance in small U.S. firms: The moderator role of social
media capability. Information & Management, 55(1),
No potential conflict of interest was reported by the authors. 131–143. https://doi.org/10.1016/j.im.2017.09.004
Benitez, J., Chen, Y., Teo, T. S. H., & Ajamieh, A. (2018).
Evolution of the impact of e-business technology on
operational competence and firm profitability: A panel
ORCID data investigation. Information & Management, 55(1),
John Qi Dong http://orcid.org/0000-0002-3169-7790 120–130. https://doi.org/10.1016/j.im.2017.08.002
Benitez, J., Henseler, J., Castillo, A., & Schuberth, F. (2020).
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