Small and medium enterprises (SMEs) are known as the heart of the global economy and the lifeblood of the economy because of their role in business society’s productivity and innovation of the country (Weaven et al. 2021). There are small and medium-sized enterprises (SMEs) in Indonesia that account for 99.99% of business units and significantly contribute to the country’s economic growth (Hidayati & Sitompul 2022). As a result of their enormous numbers, SMEs serve as the foundation of a country, not just in Indonesia but also in other modern countries (Miller 2019).

Globally, SMEs play an important part in creating jobs, accounting for 50% of total employment, helping to reduce unemployment, promote competitiveness and contribute to global economic growth (Khan et al. 2024; Raihan 2024). In Indonesia, SMEs contributed 56.18% of the gross domestic product (GDP) rate in 2010, grew to 61.41% in 2015, and reached 61% in 2018. At the same time, from 2010 to 2018, the percentage of Indonesia’s main labour absorbers remained consistent at 97% (Hidayati & Sitompul 2022).

Small and medium enterprises are clearly distinct from large businesses. Many challenges and problems have been encountered, particularly when dealing with e-commerce, therefore it is important to study SMEs, especially their performance (Burvill, Jones-Evans & Rowlands 2018). The performance of SMEs has demonstrated their dependability in the face of various challenges during the global crisis phase (e.g. the coronavirus disease 2019 [COVID-19] and global financial crises) (Dejardin et al. 2022). Furthermore, there is an opportunity for SMEs to continuously grow in this digital era, develop their capabilities and be highly competitive by implementing e-commerce into their business development (Grimmer et al. 2017) because e-commerce is being utilised as a rapid vehicle to transform the world, and it has the potential to have a significant impact on their businesses as important variables for conducting business for the entire world’s companies, including SMEs without exception (Phiri 2019). However, the literature has identified SMEs’ barriers as poor planning, a lack of formal processes and a lack of understanding of the value of digital technologies and business performance (Quinton et al. 2018). To put it another way, in order to adapt to changing business environments, SMEs must have a dynamic capability (DC) perspective.

Dynamic capability is defined as the firm’s ability to integrate, build and reconfigure internal and external capabilities to deal with rapidly changing situations. It reveals the ability to sense and then seize opportunities quickly and competently, recognising sensing and seizing as fundamental dimensions of DC (Zahoor & Lew 2022). Furthermore, DC activities include (1) transforming and recombining assets and resources, (2) replicating a process or system in operation, (3) experimenting and reflecting and (4) integrating assets and resources (Eikelenboom & De Jong 2019). The literature on DC and firm’s performance, proposed in earlier conceptual studies, has been empirically positive and significantly proven (Dejardin et al. 2022). Performance is enhanced when specialised skills are built (e.g. information technology [IT] management and innovation) using the DCs’ perspective (Muna et al. 2022). Other studies, on the other hand, have found negative effects of DC on firm’s performance (Hernández-Linares, Kellermanns & López-Fernández 2021). Our research fills a knowledge gap by examining how environmentally conscious SMEs enhance performance from a DC’s perspective. The research investigates e-commerce capabilities and management capabilities as extending the DCs concept in the context of SMEs. Our findings show that successful SMEs use e-commerce in their business development (Grimmer et al. 2017), and SMEs’ management capability is expected to overcome internal conflicts, resulting in a competitive advantage and improved performance (Alcalde-Heras, Iturrioz-Landart & Aragon-Amonarriz 2019).

Scholars have studied a variety of factors that influence the performance of SMEs, focussing primarily on strategic, competitive, capability and managerial perspectives (Zahoor & Lew 2022). Additionally, prior studies on the performance of SMEs found that the factors that influence are entrepreneurial orientation (EO) (Hernández-Linares, Kellermanns & López-Fernández 2018), market orientation (MO) (Homaid, Minai & Al-Ansi 2018), learning orientation (LO) (Homaid et al. 2018) and a combination of these three factors (Grimmer et al. 2017) known as strategic orientation. More along the lines, SMEs should be concerning their strategic orientation in developing DCs to improve performance (Jiang, Mavondo & Zhao 2020). Previous research has primarily focussed on how strategic orientation directly impacts DCs; however, a few studies have argued that strategic orientation plays a role in the development of DCs (Jiang et al. 2020). This study investigates whether and how complementarity between EO, MO and LO as strategic orientation can enhance business performance, adapt to changing environments by leveraging their DCs and achieve sustainability.

Based on the aforementioned backgrounds, the research question is: ‘Do DCs and strategic orientation impact the performance of SMEs in Indonesia?’. The objectives of this article are: (1) to analyse the impact of DCs on the strategic orientation and performance of Indonesian SMEs; (2) to analyse the impact of strategic orientation on the performance of Indonesian SMEs; (3) to analyse whether strategic orientation mediates the impact of DCs on SME performance; (4) to contribute to the existing literature on DCs in the context of SMEs and (5) to suggest any recommendations for SMEs, academicians and the government.

These results contribute to the literature on strategic management and the DCs’ perspective. This research contributes to dealing with issues such as the environment (consumers, suppliers and competitors) in this case a dynamic market environment, rapid technological growth, competition, planning future strategies, predicting opportunities and threats that will occur by exploiting existing factors based on the findings of this research later on. Specifically, the research investigates e-commerce capabilities and management capabilities as extending the DCs concept in the context of SMEs in the culinary sub-sector of the Indonesian creative industry. Furthermore, the study analyses how these DCs, along with strategic orientation, influence SME performance. The study also aims to highlight the mediating role of strategic orientation between DCs and SME performance.

This study ensures that all constructs are reliable and meet the conditions for convergent validity. Additionally, the analysis of discriminant validity adheres to the criteria established by Fornell and Larcker, which states that the square root value of the Average Variance Extracted (AVE) for each construct must exceed the correlation with the other constructs in the model (Dejardin et al. 2022). The AVE of each construct is greater than the correlation of another construct. As a result, this study can consider all the measurement instrument’s results to be valid and reliable for application.

Hypotheses were tested by analysing the t-values and p-values after running a bootstrap procedure with 1000 resamples. The significance level was set at p-values less than 0.10 for marginal acceptance and less than 0.05 for acceptance (Falahat et al. 2021). The t-statistic or p-value is used to demonstrate acceptance or rejection of a hypothesis. The path coefficient is also used to indicate the simultaneous direction of the relationship between independent and dependent variables, as well as an indirect relationship. By examining the structural model and developing a linear equation, all hypotheses were demonstrated (Prabowo, Sriwidadi & Ikhsan 2021).

The variance inflation factor (VIF) is used to assess collinearity. Multicollinearity is a statistical phenomenon in which two or more independent variables or exogenous constructs are highly correlated, resulting in a poor predictive ability of the model. The VIF value requirement must be less than 5 because it does not indicate collinearity between constructs (Sekaran & Bougie 2016). This study shows that the VIF value is less than 5, indicating that there is no problem with multicollinearity.

The study analysed the relationships between DCs, strategic orientation and SME performance as well as the roles of e-commerce capability, management capability and strategic orientation as a mediator. Furthermore, this study analysed:

The results of hypothesis testing are summarised in Table 1:

This study’s findings expand our knowledge of DCs’ perspective. This study examined four hypotheses related to the DCs’ perspective. Firstly, this study determined how positive and significant e-commerce and management capabilities as an extension of DCs can affect the performance of SMEs. The result from the research shows the path coefficient for this relationship is 0.208 with a p-value of 0.357. Therefore, even though there was a positive impact of DCs on performance, this study finds an insignificant relationship between DCs and SMEs’ performance. This is consistent with previous DC research, which found that not all DCs have a positive and significant effect on performance, implying that DC does not always generate superior performance directly (Hernández-Linares et al. 2021; Wilden et al. 2013). Furthermore, this finding interprets that e-commerce and management capabilities as components of DC were found not to impact on SME performance context directly. The result highlights that the DC-performance relationship may be mediated or moderated by other variables (Hernández-Linares et al. 2021). This finding suggests that while e-commerce and management capabilities are important, they might not directly enhance performance without other factors. Future research could explore potential mediators or moderators that could strengthen this relationship.

Secondly, this study determined a strategic orientation (SO) can positively and significantly affect SMEs’ performance. The result of the research shows the path coefficient for this relationship is 0.400 with a p-value of 0.057. This hypothesis is supported at the 0.10 significance level. This finding suggests that SMEs must adopt a strategic orientation to enhance their performance. Scholars state that several single orientations, such as EO, MO and LO, have a positive and significant effect on performance; our study supports these arguments. As presented by Yang (2017), the factors that elevate SMEs’ performance are SMEs with innovative, proactive, risk takers, customer orientation, competitor orientation, and inter-functional learning processes. Furthermore, the study’s focus on strategic orientation as a broader construct might capture more comprehensive effects than studies focussing on single orientations. The positive impact of strategic orientation underscores the importance of SMEs adopting a proactive, customer-oriented approach to enhance performance. This supports the idea that SO is a crucial component of competitive advantage.

Thirdly, this study analysed the effects of positive and significant DCs on SO. The result shows the path coefficient for this relationship is 0.763 with a p-value of 0.000. This hypothesis is supported at the 0.10 significance level. The DC–SO relationship effect is found to be both positive and significant. This is consistent with previous literature indicating that owners who focus on the effectiveness and efficiency of operational activities (Dolan & Goodman 2017) will improve their strategy (Gregory et al. 2019). This study’s strong effect size may suggest that DCs are particularly influential in environments characterised by rapid change. The significant impact of DCs on SO highlights their role in enabling SMEs to adapt and align their strategies with market demands.

Last but not least, this research highlights SO would strengthen the relationship between the combination of e-commerce capabilities and management capabilities on performance as a mediating variable. This result shows the path coefficient for this indirect relationship is 0.305 with a p-value of 0.072. This hypothesis is supported at the 0.10 significance level. This study’s finding supported by empirical findings suggests that SO is implemented as a mediator between DC and improved performance. This finding is consistent with previous research that used SO as a mediating variable (Abdulrab et al. 2021). The SO mediation effect is empirically proven to be that SMEs with a strong DCs’ perspective will improve their strategic orientation to be more effective and efficient in operational activities, resulting in higher performance. However, the role of SO as a mediator may not be emphasised in all studies, suggesting different pathways of influence depending on the context. This finding emphasises the mediating role of SO, indicating that SMEs should focus on enhancing strategic orientation to leverage their DCs effectively.

This study has implications for SMEs seeking to develop their DC. A qualified SME will adapt to the environment by being able to solve their problems. Dynamic capability enables SMEs to establish, extend and modify their resources and capabilities to deal with uncertain business environments and internal conflict, increasing effectiveness, generating competitive advantage and profits, and achieving better performance. The findings of this study suggest that SMEs must have both e-commerce and management capabilities SMEs when dealing with the dynamic market environment. Understanding the fundamentals of the theory underlying DCs – the ability to adapt to a dynamic market environment to obtain a competitive advantage – in the context of SMEs is critical to this study. The study is designed to examine the effects of DCs’ perspective on performance and highlight SO as a mediating variable. The research has several limitations. Firstly, this study examined hypotheses using cross-sectional data, which may be limited; future studies can use longitudinal data to increase confidence in the findings (Zahoor & Lew 2022). Secondly, a recommendation for future studies with a larger sample size and in the same or additional industry fields is provided. Thirdly, this study examines the impact of DC on the performance of SMEs and finds it to be insignificant. Further study is required to examine the DCs and performance of SMEs employing various resource and capability combinations.

The purposes of this article are (1) to analyse the impact of DCs on the strategic orientation and performance of Indonesian SMEs; (2) to analyse the impact of strategic orientation on the performance of Indonesian SMEs; (3) to analyse whether strategic orientation mediates the impact of DCs on SME performance; (4) to contribute to the existing literature on DCs in the context of SMEs and (5) to suggest any recommendations for SMEs, academicians and the government. The results demonstrate that DCs have a positive impact on performance but are not statistically significant. Furthermore, strategic orientation positively and significantly affects performance. Moreover, DCs have a positive and significant impact on performance. Finally, DCs play a positive and significant role in mediating SO on performance.

This study expands the literature in several ways. Firstly, these results contribute to the literature on strategic management and the DCs’ perspective. Furthermore, this study highlights the examination of how strategic orientations serve as a mediating variable between DCs and SMEs’ performance. Secondly, this study aims to address concerns in the business environment, such as competition, rapidly evolving technology, dynamic market conditions, future strategy planning, and the prediction of opportunities and threats. Lastly, based on the research in the literature on the effects of strategic orientation and DCs on SMEs’ performance, it is expected that quality SMEs will adopt these elements in order to enhance their overall performance.

The study provides valuable insights into the dynamics between DCs, SO and performance in SMEs. While the direct impact of e-commerce and management capabilities on performance was not significant, the study highlights the critical role of strategic orientation as both a direct influencer of performance and a mediator. This suggests that SMEs should focus on cultivating a robust strategic orientation to effectively leverage their DCs.

Overall, the findings emphasise the complexity of the relationship between capabilities and performance, suggesting that strategic orientation is a key mechanism through which DCs can be translated into improved outcomes. Future research should explore these relationships further, considering different contexts and potential moderating factors to deepen the understanding of how SMEs can enhance their competitive advantage through DCs.