The Impact of Dynamic Capabilities on Financial Performance: The Role of Organizational Inertia in the Digital Transformation of SMEs

This study examines whether organizational inertia moderates the relationship between digital dynamic capabilities and financial performance in small and medium-sized enterprises (SMEs) in Lima, Peru. Addressing a literature gap about how inertia conditions the performance results of digital capabilities in SMEs, and grounded in dynamic capabilities and organizational inertia theories, this research proposes and test a framework in which inertia conditions the effectiveness of digital dynamic capabilities (digital sensing, digital seizing, and digital transforming) in relation to firm performance. Using a sample of 220 executives from the manufacturing sector and partial least squares structural equation modeling (PLS-SEM) the results indicate that digital dynamic capabilities are positively and significantly associated with financial performance. Organizational inertia acts as a moderator that typically weakens this relationship, although it strengthens the association between digital sensing capability and financial performance. These findings underscore the importance of flexible management of inertia in optimizing resources, enhancing digital capabilities, and improving financial performance. By integrating digital capability development with perspectives on organizational inertia, this study helps clarify how contextual factors condition the outcomes of digital transformation in SMEs operating in emerging economies.