The interplay of digitalisation, strategy and dynamic capabilities. Insights from an exploratory study in German Mittelstand firms.

Abstract: Digitalisation requires a reassessment of firms' existing resources and capabilities. Decreased value of resources and capabilities might lower strategic fit between the firm and the market. Firms can respond to changes in the environment through a change in strategy, manifested in a redirection of capability investments. However, the link between strategy and digitalisation has received little attention in academic literature so far. We explore and explicate the influence of digitalisation on firm strategy and shed light on the role of dynamic capabilities in strategy transformation. We conduct an exploratory, qualitative case study based on semi-structured interviews with top management from the German Mittelstand mechanical engineering industry and industry experts. We find firms start to shift their strategy from pure differentiation to a hybrid strategy. Firms complement differentiation advantages by generating cost advantages simultaneously. Findings suggest digitalisation both enhances existing competitive advantage and increases operational efficiency. Strategy transformation is supported by primarily four dynamic capabilities: human resource management capability, learning capability, collaboration capability and business development capability. Further research with other firms and industries is needed to support the findings.