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1. Introduction
Small-to-medium-sized enterprises (SMEs) are stand-alone firms with fewer than 500 employees (Baird et al., 1994). SMEs constitute 90% of businesses and employ more than 50% of workers worldwide, contributing up to 40% of the gross domestic product (GDP) in emerging economies and up to 55% in developed economies (Arnold, 2019; World Bank, 2021). Hence, the importance of SMEs to the world’s economy cannot be overstated.
Unfortunately, SMEs are vulnerable to exogenous shocks. This is because SMEs have fewer resources to draw upon than larger companies. For instance, 50% of SMEs have less than 15 days of operating capital on hand (Fairlie, 2020). This relative sparsity of resources (Cooper et al., 1994; Ebben and Johnson, 2005; Gibb, 2000; Lee et al., 1999) limits the options for SMEs to respond to exogenous shocks. For example, during the COVID-19 pandemic, 43% of US SMEs temporarily closed and employment by US SMEs decreased by 40% (Bartik et al., 2020).
It thus behooves researchers to understand how SMEs can use their existing resources to stay competitive. Information technology (IT) capability is such a resource that, we argue, exists in SMEs and that is central to their performance. Therefore, understanding how SMEs can leverage their IT capability (ITC) to achieve financial success can offer valuable insights for SMEs and their stakeholders.
The focus of this study is on the role of ITC in allowing SMEs to adapt to changing customer demands. Our basic premise is that for SMEs to grow and remain profitable in fierce market competition, they must make efficient use of their IT resources to innovate their value propositions. Our work thus extends the literature which has already established the vital role of business model innovation (BMI) in driving business success (e.g. Casadesus-Masanell and Ricart, 2010; Kim and Min, 2015; Zhang et al., 2021) but scarcely examined the role of antecedent factors, such as ITC, that enable innovation. Specifically, the literature largely focuses on IT-enabled innovation as an outcome without specifically examining how ITC enables innovation (e.g. Arnold et al., 2016; Kiel et al., 2017; Erevelles et al., 2016). Understanding how and when ITC leads to innovation is critical, as investments in IT often fail to yield the anticipated...