OPTIMIZING DIGITAL TRANSFORMATION STRATEGIES IN SMEs TO OVERCOME

RESOURCE AND EXPERTISE LIMITATIONS.

2.0. LITERATURE REVIEW

The literature review examines the path of digital transformation (DT) in small and medium-

sized businesses (SMEs), emphasizing the difficulties they have, especially regarding a lack of

resources and experience. It looks at important topics such knowledge gaps, financial and

human resource limitations, and the strategic challenges that SMEs face while attempting to

implement new technology. This section examines current DT tactics and optimization

techniques to highlight options for successfully overcoming these obstacles, such as

collaborative models, low-cost solutions, and skill development. To pave the way for future

studies on sustainable DT tactics suited to SMEs, the study ends by pointing out gaps in the

literature.

2.1 Definition and Scope of Digital Transformation in SMEs

The two most significant disruptions that businesses are currently dealing with are

transformation and digitalization. Rapid digitalization has brought about revolutionary changes in

today's corporate environment, posing a threat to established company models in every sector.

Most businesses welcome change to remain competitive. According to Parviainen et al. (2017),

digitalization is thought to be the main trend that will change societal and corporate structures in

the future.

Digital transformation is defined as "the incorporation of technology into all details of life by

utilizing the advantages of the technological and communications revolution, especially in terms

of the speed of exchanging and transferring information and data" (Dung & Tri, 2021). This

results in a drastic change in how people live, work, and communicate, including using artificial

intelligence, the Internet of Things, and other developments. "A central framework for integrating

the entire coordination, prioritization, and execution of digital transformation within a firm" is how
Matt, Hess, and Benlian (2015) define digital transformation strategy (p. 339). Interaction,

communication, and teamwork are therefore key areas of focus within the company (Oney et al.,

2018). Particularly for SMEs, external contacts and collaborations are important when it comes

to access and/or adoption of innovative technology (Kilubi and O'Regan, 2016; Neirotti et al.,

2018). From the standpoint of digitalization as an organizational or economic concept, "digital

transformation" has been defined extensively in a variety of literature. Although these definitions

are not very different, they all share the adoption of technologies, process improvement, and

value creation as commonalities (Mergel et al., 2019). Technical issues are less relevant to

digital transformation than managerial ones. Successful digital transformation necessitates not

only the acquisition and use of technological resources but also—and probably more importantly

—the resolution of management issues, the investment in organizational capacities, and the

development of e-commerce human resources (Cha et al., 2015).

Figure1: As cited in Bilal, M., Xicang, Z., Jiying, W. et al. Digital Transformation and SME
Innovation: A Comprehensive Analysis of Mediating and Moderating Effects. J Knowl Econ
(2024).
2.2 Importance of DT for SMEs in enhancing competitiveness, growth, and
adaptability in emerging markets.

1. Strategic Alignment to the Changing Market

In today’s company environment, digital transformation is extremely important for several strong

reasons. It is essential for helping businesses adjust to the constantly changing market

conditions and satisfy the ever-rising needs of the contemporary consumer. According to

Bharadwaj et al. (2013), digital transformation enables businesses to stay competitive in a

global economy that is marked by fierce rivalry and quickly shifting customer expectations. The

significance of digital transformation in the context of SMEs is especially notable. These

businesses frequently struggle with a lack of resources, but digital transformation is a useful tool

that helps them catch up to larger businesses. By giving them access to cutting-edge

technology, affordable digital marketing tools, and a worldwide market reach, it helps SMEs

level the playing field (Henderson, Serido, & Bialeschki, 2014). Digital transformation gives

SMEs the ability to better engage customers, react quickly to changes in the market, and

strengthen their position as competitors in the global business environment. All things

considered, digital transformation has become a critical and strategically necessary process for

businesses of all kinds as it enables them to adapt to a constantly shifting global marketplace,

embrace the digital age, and stay competitive.

2. Increase Operational Efficiency and Creation of Jobs

In developed and emerging nations, SMEs are essential for fostering innovation and creating

jobs (Gherghina et al., Citation2020; Mago & Modiba, Citation2022). The number of workers

and company income are the most prominent parameters used to define SMEs, albeit these

vary by country (Montoro-Sanchez et al., Citation 2018). SMEs frequently confront limitations in

their professional capability and resources, despite their propensity for higher agility and

adaptation to changes in the environment (Costa et al., Citation2024; Troise et al.,

Citation2022). Due to these difficulties, SMEs are always looking for methods to maintain their
SCA, especially considering digital transformation (DT). Organizations have been forced to

embrace digital transformations to improve efficiency, competitiveness, and long-term

sustainability goals due to the rapid advancements in digital technologies, including information

technology, artificial intelligence (AI), the internet of things (IoT), and others. Digital

transformation is predicted to have a profound impact on every element of our lives, including

the major shifts taking place in all spheres of society, businesses, and sectors, including small

and medium-sized businesses. Sustainable development is greatly advanced by information

technology, particularly digital services and communications (Wu et al., 2018).

3. It Fosters Innovations, and Economic Growth

Furthermore, it stimulates economic growth and generates new job opportunities that contribute

to poverty alleviation and the development of plans and projects meant to achieve the goals of

the digital revolution and the shift to an information-based society. These modern technology

tools make it possible to provide information, making it easier to access and answer consumer

questions. Consequently, this raises the standard of services provided by organizations, which

boosts output and eventually helps to achieve sustainable development goals. The digitization

of small and medium-sized businesses (SMEs) has a direct effect on sustainability's social and

environmental facets in addition to its economic importance (Denicolai et al., 2021). Routine and

activity-based occupations have been eliminated because of the digital transition, which has

also reduced material consumption. The ecosystem has benefited from this in several ways

(Pereira et al., 2020). 90% of all firms are small and medium-sized enterprises (SMEs), which

also account for 50% of all jobs worldwide (World Bank, 2022). It is anticipated that developing

nations would lose a greater percentage of their workforce to activity-based jobs as a result of

digital transformation than will affluent nations (Pereira et al., 2020).Digital transformation helps

SMEs make sustainable investment decisions because these decisions are based on vast

amounts of data, and with the help of digital transformation techniques, it is easier to analyze
this data and get the most out of it. This is reflected in the institution's business results, which

are better than those of its competitors (Stich et al., 2020).

Figure 2: Digital Adoption 2024

https://www.digital-adoption.com/

2.3 Digital Transformation in Nigeria SMEs

A fundamental grasp of the situation is offered by the present degrees of digital

transformation adoption in Nigerian SMEs. The degree to which Nigerian SMEs

embrace this transformative process is still a relevant question, even if acceptance of

digital transformation in SMEs is increasing globally (Smith & Jones, 2019). According

to studies, the landscape of digital transformation in Nigeria is changing, with more

SMEs realizing the importance of digital technology (Odo & Akinyemi, 2019). However,

there is a need for a more comprehensive study of the present adoption levels, split by

industry and size, to provide a detailed picture of the state of the digital transformation in
the country's SME sector. Finding the most important tools and technologies in use is

crucial to comprehending the ecosystem of digital transformation in Nigerian SMEs.

Cloud computing, data analytics, the Internet of Things (IoT), artificial intelligence (AI),

and e-commerce platforms are just a few of the many technologies that fall under the

umbrella of digital transformation (Chen & Wang, 2020). The research can identify

trends and areas of attention, which may differ depending on the industry, by closely

examining the particular technology that SMEs in Nigeria are using into their operations.

This data will be used as a starting point for additional research on how well they

increase competitiveness.

A variety of obstacles and hurdles frequently stand in the way of the successful

execution of digital transformation projects (Bharadwaj et al., 2013). Financial

limitations, resource shortages, and inadequate infrastructure are some of the unique

difficulties Nigerian SMEs confront (Kassahunet et al., 2017). Progress can also be

hampered by organizational factors such as a lack of digital skills and aversion to

change (Sushil et al., 2018). To create specialized methods for overcoming these

obstacles, a thorough investigation is required to identify and classify them within the

Nigerian SME setting.

2.4 Challenges of Digital Transformation for Nigeria SMEs

Numerous obstacles prevent SMEs in Nigeria from growing and becoming sustainable

(Kindström, Carlborg & Nord, 2024, Le, et al., 2021). These difficulties include restricted market

access, regulatory obstacles, poor infrastructure, and restricted financial availability.

1. Limited Access to Finance

Africa's SMEs need a sufficient supply of financial resources to grow. However, it has

been said that a lack of funding is a hindrance to this kind of expansion (Fjosee et al.,

2010). In actuality, the issue of SMEs' inability to obtain credit or financing is well

acknowledged. Researchers in Africa concur that one of the biggest obstacles to SMEs'

survival and expansion is their difficulty to obtain financing (Ariyo, 2004; Cook, 2001;

Horn, 1998; Mambula, 2002). According to a World Bank survey conducted over a ten-

year period in more than 100 countries, The Enterprise Surveys indicated that, in

contrast to other regions of the world where the issue was minor, access to financing

was the biggest barrier impeding the operations and expansion of SMEs (Beck & Cull,

2014).

According to a study by Inegbenebor (2006), just 10% of Nigerian SMEs obtained bank

loans, while 61% obtained their funding from friends and other unofficial sources rather

than from the government or financial institutions. Financial institutions' high

comparative interest rates, collateral requirements, and loan guarantees make it

extremely difficult for SMEs' owners to obtain financing (Shah, Nazir, Zaman & Shabir,

2013). Banks also point to challenges in providing SMEs' owners with loans. They

contend that SMEs' profits are only lowered by the expenses associated with managing

modest loans to them. Similarly, rules requiring financial defaulters to repay their loans

in full are sometimes relatively weak in many nations (Benzing & Chu, 2012). In contrast

to South Asia, where just 25% of respondents mentioned financial access as a

limitation, 48% of all respondents claimed lack of access to financing, according to the

World Bank Enterprise Survey Database. Weak financial markets or unfavorable

borrowing circumstances are linked to a lack of sufficient or easily accessible funding,

which many African enterprises might exploit to support their expansion (Hatega, 2007;

Kauffmann, 2005).

2. Insufficient Talent and Skills

Employees are seen to be the main impetus behind small and medium-sized

businesses' digitalization. For SMEs, finding highly skilled personnel has become

difficult. Because of its high-tech nature, digitalization has made hiring and qualifying

employees more difficult. Numerous research, such as Eller et al. (2020), Peillon &

Dubruc (2019), and Rachinger et al. (2019), corroborate the assertion. Furthermore,

because there are little career options, SMEs are neither interested in nor searching for

highly skilled individuals, according to Leu & Masri (2019). As a result, highly qualified

workers are more likely to choose larger organizations with higher salaries and

opportunities for advancement (Leu & Masri, 2019).

The inability of many SMEs to manage effectively is a significant problem. This indicates

the expertise, abilities, and experience of managers and business owners. The ability of

a management to integrate both material and immaterial resources to create

capabilities, which when achieved, leads to competences, is the foundation of

competency (Muriithi, 2015). Beyond management competence, Hewitt and Wield

(1992) contend that the significance of human resource competencies cannot be

overstated. SMEs with a workforce that is educated and skilled operate well. Lee

(2001), who noted that the most successful companies have highly developed human

resource capacities, lends more credence to the idea. These companies also
experience favorable growth as a result of having knowledgeable and driven staff

members, which ultimately leads to high productivity and the long-term viability and

longevity of the company. Sadly, a number of studies have identified insufficient human

resource skills and capacities as one of the main issues that SMEs in the majority of

developing nations, particularly Africa, face (Geeta & Hong, 2003; Bouazza, Ardjouman

& Abada, 2015; Lee, 2001). Lack of core competences and capacities continues to be a

major issue for SMEs in Africa and other areas of the world, making this issue even

more severe at the top management level (Aylin, Garango, Cocca & Bititche, 2013;

Bhide, 1996; Pasanen, 2007).

3. Poor Management/Lack of Clear Strategy

Poor management is one of the biggest problems that companies from all over the

world face. This results from the fact that the majority of SMEs' managers or operators

lack managerial experience. Their management style is mostly based on trial and error

and is motivated by performance and short-term benefits with little attention paid to

strategic planning because many business owners lack the necessary expertise and

experience to run their companies (Hill, 1987). Notably, some firm owners possess

viable concepts and are skilled in their particular domains, but they are devoid of

managerial abilities and business management expertise (Brink, Cant & Lightelm,

2003). Poor management has been a major issue in both industrialized and developing

nations like Nigeria. Poor management was identified as a primary cause of retail

bankruptcies and business failure in the United States as early as the 1930s (Cover,

1933). According to Peacock (1985), the issues are still present and are linked to 92%

of business failures in the US and 96% in Canada.

4. Inadequate Infrastructure/Budget

Inadequate infrastructure is another significant issue that SMEs in emerging regions have to

contend with. SMEs may find it difficult to operate and expand into new markets due to

inadequate transportation networks, unstable power supplies, and poor internet connectivity

(Benjamin, Amajuoyi & Adeusi, 2024, Ikegwu, 2022, Onyekwelu, et. al., 2024). For SMEs to

move completed items and raw materials to and from their facilities, transportation networks are

crucial. Inadequate rail and road systems can raise transportation costs and cause delays in

many emerging countries, which can affect SMEs' ability to compete.

5. Regulatory Challenges

Emerging market SMEs are faced with convoluted and uneven regulatory frameworks that may

make it more difficult for them to conduct business. For SMEs, laws pertaining to employment,

taxation, licensing, and business registration can be complicated and challenging to understand,

which can cause delays and higher expenses (Joel & Oguanobi, 2024, Nembe, et al., 2024,

Udeh, et al., 2024). SMEs may also face difficulties due to regulatory procedure corruption and

inefficiency. In order to speed up regulatory clearances, bribes and kickbacks could be

necessary, which would increase operating costs and level the playing field for SMEs. Efforts

are being made to lower bureaucratic obstacles for SMEs and expedite regulatory procedures in

order to solve these issues.

6. Competitions ad Restrictions

SMEs in developing nations like Nigeria frequently struggle with competitiveness and market

access. High tariffs and other trade restrictions might make it more difficult for SMEs to grow

their businesses outside of their home market. Furthermore, larger businesses with more

resources and economies of scale frequently compete fiercely with SMEs (Afolabi, 2024,

Ikegwu, 2018, Nembe, 2014, Oguanobi & Joel, 2024). SMEs may find it challenging to acquire
market share and engage in effective competition as a result of this competition. SMEs can use

tactics including partnering with other SMEs to pool resources, adopting digital technologies to

access new markets, and concentrating on specialized areas where they can effectively

compete in order to improve market access.

Figure 3: Mushahid Khatri (2023)

2.5 Optimization Approaches for Overcoming Resource and Expertise Limitations

1. Employing Optimal Utilization Techniques.

Digitization has the potential to reduce the consumption of labor, energy, and time. According to

Brüggemann (2020), digital transformation involves reducing resource waste, such as that of

labor, energy, and time, by employing optimal utilization techniques. Employing technology,

computerization, digitalization, and automation of repetitive procedures may help organizations

save resources, boost productivity, and streamline operations. Increased efficiency in resource
allocation through digitalization reduces waste and enables more sustainable and lean

operations for businesses (Brüggemann, 2020). Implementing technology that lowers paper-

based workflows, simplifies operations, and removes manual procedures from the system is

part of the use of digitalization in resource optimization (Topić, 2020). As a result, SMEs and

conventional businesses may reduce their use of energy, labor, and time, increasing operational

sustainability and efficiency. Additionally, digitalization enables businesses to leverage data and

analytics to maximize resource use. For example, SMEs may utilize the data on energy use to

find energy-saving strategies that can drastically cut costs while having no adverse effect on the

environment.

2. Combining Digital and Real-World Environments

The boundaries between the digital and physical worlds will become increasingly hazy in the

corporate world of the future. SMEs must concentrate on developing smooth omnichannel

experiences that let clients communicate with their brands on several channels. SMEs must

create integrated strategies to effectively engage customers in light of the growing popularity of

hybrid shopping models, in which buyers combine online and physical experiences. Using

virtual reality (VR) or augmented reality (AR) technology to improve product experiences and

expedite the customer journey may be part of this strategy.

3. Making use of Fintech and other funding options for SMEs

SMEs have systemic obstacles in obtaining suitable funding sources that are essential

for innovation and expansion at every stage of their existence (OECD, 2019[2]). Internal

obstacles include inadequate financial abilities, a lack of information and awareness of

funding sources and alternatives, and a lack of collateral to be offered to funders and

investors as guarantees. Information asymmetry between financial institutions and SME

management, as well as comparatively higher transactional and borrowing costs for

financing institutions that cater to SMEs, are examples of market obstacles.

Big data, distributed ledger technology (DLT), digital identity verification, and

marketplace financing are just a few of the cutting-edge services that financial providers

are providing with the potential to completely transform SME finance markets. By

drastically lowering information asymmetries and transaction costs, mobile banking,

(international) mobile payments, and the use of alternative data for credit risk

assessment might make it possible for SMEs to obtain financing. Fintech, or

technology-enabled innovation in financial services, is becoming more and more

significant in providing services that are easier to use and more accessible, as well as

more accurate credit risk assessments and cheaper transaction costs (OECD, 2019[2]).

4. Increasing the SME digital security profile

SMEs frequently lack the resources and expertise to properly assess cyberrisks and implement

suitable prevention and management measures (OECD, 2019[2]). Hyper-connectivity increases

the vulnerability of digital infrastructure by adding layers of complexity, volatility, and

dependence to existing infrastructures (OECD, 2017[33]). The sophistication, frequency, and

magnitude of digital security threats seem to be rising, and unintentional breaches can also

arise from misuses of personal data, such as employee error or accidental data loss. However,

SMEs may have an advantage when forming commercial alliances, particularly with larger firms,

if they can show that they have strong digital security and privacy policies. As a result, it will

become more crucial for SMEs to integrate digital security risk management into their operating

procedures in order to participate in the global economy.

5. Training and Up skilling Employees

Employees must be trained and upskilled to use new digital tools and platforms. This

preparedness includes the capacity to adjust to new working methods in addition to

technical proficiency. Employee support and participation in digital transformation

projects can be increased by involving them in the process and responding to their

opinions and concerns (Sushil, Kaur, & Sharma, 2018). The landscape of digital

transformation for SMEs is also influenced by environmental factors and regulatory

frameworks. The extent or rate of digital transformation may be constrained by industry-

specific legislation or regulatory restrictions. Meanwhile, advantageous regulatory

frameworks, including incentives or data protection laws, can support digital

transformation. The viability and rate of digital transformation can be greatly impacted

by environmental factors, such as the availability of dependable internet access and

infrastructure (Kassahunet al., 2017).

6. Adoption of Service Automation

Adopting the concept of "service automation," which is based on a notable

demographic and sociological trend, is another technique to maximize digital

transformation tactics. This concept involves using automated technology to win over

customers. For many years, the self-service generation has made it easier to look for,

evaluate, and buy products online (Middelburg, 2017). Service automation entails

integrating all domain and functionality tools into various automation layers to produce a

single interface for all processes. It is the process of automating company operations,

events, processes, and jobs. Examples of automated customer service include

knowledge bases and self-service portals. Standard email answers, or prepared

responses, are frequently used. Live chat, virtual assistants, and chatbots. Devices,

software, data, and infrastructure are the core components of service automation.

2.6 Gaps in Literature

There is still a large void in the literature on technological change tactics for SMEs that

addresses the subtle techniques that maximize transformation efforts, particularly when

faced with resource and expertise limitations. Few studies offer a targeted analysis of

flexible, affordable tactics that SMEs might adopt given their constrained finances and

labor skills, despite the fact that numerous researches examine broad frameworks for

digital transformation. How SMEs may maintain these endeavors over time is frequently

not thoroughly examined in current research, particularly when it comes to the particular

difficulties brought on by sector-specific requirements and quick technology

advancements.

Furthermore, although government and third-party support initiatives are often

addressed, little is known about how well they work over the long run to give SMEs the

tools and resources they need for long-lasting digital transformation. More focused

research that offers practical insights into low-cost, scalable solutions and support

systems designed especially for SMEs with severe resource and expertise constraints is

therefore desperately needed.