http://www.smallbusinessinstitute.biz A B S T R A C T Keywords: Journal of Small Business Strategy 2020, Vol. 30, No. 03, 65-85 ISSN: 1081-8510 (Print) 2380-1751 (Online) ©Copyright 2020 Small Business Institute® w w w. j s b s . o rg Introduction Olivia Fachrunnisa1, Ardian Adhiatma2, Najah Lukman3, Md Noh Ab. Majid4 1Dept. of Management, Faculty of Economics, Universitas Islam Sultan Agung (UNISSULA), Jln. Kaligawe Raya Km. 4 Semarang, Indonesia, olivia.fachrunnisa@unissula.ac.id 2Dept. of Management, Faculty of Economics, Universitas Islam Sultan Agung (UNISSULA), Jln. Kaligawe Raya Km. 4 Semarang, Indonesia, ardian@unissula.ac.id 3Dept. of Management, Faculty of Business and Management, Universiti Teknologi MARA (UiTM) Cawangan Terengganu, Sura Hujung, 23000 Dungun, Terengganu, Malaysia, najah@tganu.uitm.edu.my 4Dept. of Operations Management, Faculty of Business and Management, Universiti Teknologi MARA (UiTM) Cawangan Terengganu, Sura Hujung, 23000 Dungun, Terengganu, Malaysia, mohdnoh@tganu.uitm.edu.my Towards SMEs’ digital transformation: The role of agile leadership and strategic flexibility APA Citation Information: Fachrunnisa, O., Adhiatma, A., Lukman, N., & Ab. Majid, M. N.. (2020). Towards SMEs’ digital transformation: The role of agile leadership and strategic flexibility. Journal of Small Business Strategy, 30(3), 65-85. The digital era is such a pleasant era to run a business with the support of technological sophistication. Exciting new technologies, such as cloud service, big data, machine learning, and cognitive computing provide the opportuni- ty to completely change the business way (Prasad et al., 2018). The company must establish a connection to devel- op through a network of interconnected relationships in order to get the access of resources and capabilities (Mu, 2013). These externally accessible resources are able to influence the company’s performance. It is because the in- terconnected relationship provide positive relationship and competitive advantage (Havila & Medlin, 2012; Mirtega et al., 2012; Mu, 2013). In this digital era, all business sectors experience a change that requires digitization in its oper- ations, including Small and Medium Enterprises (SMEs). SMEs are also required to adapt toward the changes in order to survive and have a sustainable competitive advantage. The biggest challenge faced by SMEs is how to increase the accessibility of SMEs to go-digital, increase the capabil- ities of SMEs to produce high quality products and have a strong competitiveness to improve community welfare. In developing countries such as Indonesia and Malaysia, it is important to remember that most SMEs operates with very limited internet access and low digital-literate levels. Lack of connectivity and affordable digital access result in low attention about the importance of using digital technology, so that it affects the level of SMEs with weak readiness and digital capacity (Warner & Wäger, 2019). Therefore, this is the moment for the stakeholders of SMEs to solve this problem. Utilization of digital technology, the internet and social media can encourage the innovation capabilities of SMEs, and play a role in market expansion both regionally and globally through network capability (Cenamor et al., Digital transformation in SMEs has become a necessity in the Industrial Revolution 4.0 era. The ASEAN Economic Community will be more established if SMEs are able to take the benefit of information technology advancement in its business process. This research aims to test the role of agile leadership and strategic flexibility to improve digital transformation in SMEs among ASEAN countries. The data from this research were from 539 SMEs in Indonesia and Malaysia as representatives of ASEAN community and tested using Smart PLS 3. A total of 519 usable surveys were collected. Data testing results showed that agile leadership be- comes the key to success in implementing digital transformation. Moreover the strategic flexibility, which comes from workforce transformation and dynamic capability, is also the determining factor in the creation of digital transformation in SMEs. The fast response of the leader followed by strategy flexibility, play a significant role to the success of digital transformation implementation. Agile leadership, Strategic flexibility, Digital transformation, Workforce transformation, SMEs http://www.smallbusinessinstitute.biz http://www.jsbs.org 66 O. Fachrunnisa, A. Adhiatma, N. Lukman, & M. N. Ab. Majid Journal of Small Business Strategy / Vol. 30, No. 3 (2020) / 65-85 2019). The proven durability and adaptation capability be- come the main capital for SMEs to be the leading actors in digital economy. If during this time SMEs have difficulty in selling their products in the market, in digital economy era SMEs can easily market their products. Through trans- formation efforts towards business digitization in SMEs, it is expected that SMEs will have a sustainable competitive advantage. Digital transformation has opened up various possibili- ties for companies to interact with customers, which has led to new and unexpected business model innovations (Amit & Zott, 2001). In order to facilitate the wider marketing process of the SMEs’ product, it also needs to pay attention on the human resources readiness in the SMEs. The human resources in SMEs are expected to be able to adapt with any changes, including digitization, so that the process will run effectively, efficiently and optimally. Thus, the digitization can really facilitate the interaction experience between the company and the customer, and cover a wider market. The next problem is how does the SMEs balance the current ca- pabilities and build new digital capabilities that are compat- ible with SMEs’ dependency on a wide range of instruments in the past (Svan et al., 2017). Digitization is the fastest, most conductive and fundamental labour market intruder. According to Accenture Technology Vision (2019), it is predicted that in the year 2020, about a quarter of the world economy will be digital. The development of technology, which triggers the presence of workforce transformation, at the same time is the cause and effect of digital era. People are always trying to develop creative innovations and new discoveries. As stated by Morgan (2016), we face the next industrial revolution in form of a cyber-physical system. The revolution is not about one invention but some ongoing advances that incorporate the digital, physical and biologi- cal worlds. This leap technological becomes the main rea- son why there are so many new social measures taken and new businesses. The great expectation of SMEs development in digital era will certainly bring major changes from various facets of the company. The company will face new problems that require the important role of a leader in making decisions. Strategic decisions often arise suddenly and only have a small amount of time to immediately make the most effec- tive and efficient decision for the company’s strategy. In today’s digitization era, digital transformation becomes a strategic necessity on the leadership agenda (Singh & Hess, 2017). A leader has an important role in an organization. Facing this era, it needs an agile and sensitive leader in all aspects. The agility of a leader will produce a strategy, which will make the company, especially SMEs, follow the development of the era. In addition, it needs a leader who is able to give influence to his members in order to do the work based on the needs of the company in this dynamic era. Moreover, digital technology makes the consumer be- haviour unpredictable, and the competition experiences a rapid change (Warner & Wäger, 2019). It makes dynam- ic capabilities become an interesting factor to be analysed. Dynamic capabilities represent a suitable approach to learn the effects of information systems or their specific capabil- ities in organizations ( Contractor et al., 2017; Rialti et al., 2018. The system utilization which is able to analyse big data is often associated with general processes and routines that can be used to fix various problems related with data (Wamba et al., 2017). A big adaptable data analytics system can be used in different situations and can provide a com- petitive advantage during environmental turbulence. Simi- larly, the big data analysis capability is a set of capabilities that can help organizations to adapt with the underlying re- sources (in this case is data) to overcome the various needs of information in different situations (Rialti et al., 2018). Since these considerations are coherent with dynamic capa- bility theory which most widely used approach in research of big data and performance (Wamba et al., 2017). Through dynamic capability, it is expected that SMEs will be able to maintain the implementation of business digitization in the current era especially by knowing the readiness to change of all SMEs stakeholders, especially owners. This is because, in the current digital era, other than ability, it also needs a readiness in addressing business transformation. In order to develop SMEs in the digital era, it needs a mature strategy. The successful renewal and business mod- el transformation are the major part of strategic flexibility (Doz & Kosonen, 2010). The agility of this strategy can- not be separated from the company resources especially the workers. Towards the agility, the workers must transform to follow the development through workers who are literate in technology, information, and innovation. Not only from human resources, but it also needs to pay attention on how the company responds to the technological changes and fast markets that’s called dynamic capability (Teece, 2007). If SMEs do not follow the development, there will be no prog- ress, even the performance of SMEs itself will decreased. Existing research has been discussed about how to pre- pare SMEs to go on digital transformation; however, there is still a limited number of research that offers a complex model ranging from workforce involvement, strategy im- plementation and leadership capability. Hence, this research aims to examine the role of agile leadership and strategic flexibility in improving SMEs digital transformation. The rest of the paper is organized as follows: Section 2 is Lit- erature Review, Section 3 is Research Method, and Section 67 O. Fachrunnisa, A. Adhiatma, N. Lukman, & M. N. Ab. Majid Journal of Small Business Strategy / Vol. 30, No. 3 (2020) / 65-85 4 is Result and Discussion. Conclusion and suggestions for future research are provided in Section 5. Literature Review Digital Transformation for SMEs Transformation gives the meaning of a comprehensive change in form of appearance, character and so on in a re- ciprocal relationship for either individual or group (Sunarti et al., 2013). The transformation includes creation and it is a change from one form to completely new form in func- tionally and structurally (Kinosian et al., 2016; Margolis et al., 2017). Digital transformation related with digital technolo- gy changes can bring changes in the company’s business model. The result is there is a change in the product, in the organizational structure, or in the process automation. Fitzgerald et al. (2014) defined digital transformation as the use of new digital technologies (social media, mobile, analytics, or embedded devices) to enable the key business improvements such as enhancing the customer experience, streamlining the operations, or creating new business mod- els. Meanwhile, Liu et al. (2011) defined digital transforma- tion as an organization transformation that integrates digital technology and business processes in the digital economy. Digital transformation is not only about technology, but also about strategy. In addition, the senior leaders’ team have to find ways to leverage new and unexpected business model innovation that optimise the customers’ needs and experi- ence. Hence, it can be concluded that digital transformation is a process or business for the company in facilitating the relationship between customers with the company itself, simplify the various processes by changing the business model through the recent technology. This change is not only limited to the use of technology but also has an impact on the structural and strategy of the company to fit the busi- ness model due to the new technology. Warner & Wäger (2019) measured digital transformation on three things: navigating the innovation ecosystem, redesigning internal structures and enhancing digital maturity. The research by Li et al. (2018) about digital trans- formation on SMEs, explained that SME actors do digital transformation by utilizing the availability of digital plat- form, digital investment (ICT), social capital (Torres et al., 2018) development, building business team, and improving the ability of all members in the organization. Not only us- ing technical ability, in order to perform digital transforma- tion (Information System) Besson and Rowe (2012) argued that it also requires managerial capabilities, such as work process design, business strategy training, human resources investment in digital literacy capability. Digital transfor- mation for SME actors should not be limited to investment information technology and information system, but also more focused on the business dimension or basic business process (automation, simulation and analysis integrated data, supply chain, work design, product design, and prod- uct cycle management), products (utilization of internet, digitization with technological use for market expansion) and business model (customer oriented, adaptation ability with consumer behavior changes, increased innovation and creativity to produce products and services with a high level of personalized services). Hence, it can be concluded that SMEs who perform the digital transformation have a goal to improve the product quality and the services. Workforce Transformation and Strategic Flexibility The transformation of the workforce is a fundamen- tal change in circumstances and it requires a change in culture, behaviour and mind-set (Shaughnessy, 2018). In other words, workforce transformation requires a change in human consciousness that truly transforms the life and livelihoods (Pan et al., 2019). Transformation is not just a change; but it has a more rational, cognitive and holistic perspective and can even be spiritually oriented (Bertola & Teunissen, 2018). Workforce transformation is the creation and alteration of one form to another entirely new form functionally or structurally. Gibson et al. (2015) identified the dimensions for mea- suring workforce transformation consist of; data capture, information integrity, identity management, access and disclosure, information management governance, content compliance, information/knowledge asset management, customer support, and information analysis and business intelligence. According to Shaughnessy (2018), the di- mensions for measuring workforce transformation are, the large-scale visualization of all work; a work concept, flexible and fluid, faster and more adaptive on a daily ba- sis; adoption of new social values; and the prioritization of value-seeking activity in all work. Meanwhile, according to Stevens (2018), the dimension of workforce transformation are skills required, qualities required from workforce, com- munication, reliability, and humour. Therefore, this research will use the dimensions of skill and qualities required from workforce, adoption of new social values, flexible and fluid, and faster and more adaptive on a daily basis to measure workforce transformation. Based on previous research, in the digitization era, workforce transformation can be called a component that cannot be abandoned. Since workforce is a very important resource of a company, it needs to be developed in order to 68 O. Fachrunnisa, A. Adhiatma, N. Lukman, & M. N. Ab. Majid Journal of Small Business Strategy / Vol. 30, No. 3 (2020) / 65-85 produce the performance of companies that can compete ac- cording to the era development. In this digital era, the work- force must be literate in technology. As stated by (Uimonen, 2016), technological development is the mother of transfor- mation of the workforce. If the workforce can transform in the digital era, the company will design the strategy easily. Strategic flexibility is a company’s ability to respond to changes in the dynamic business environment in order to achieve the objectives, with the support of knowledge and superior capabilities. The strategic capabilities are comprised of an integrated workforce, process, product, and system (Warner & Wäger, 2019). Strategic flexibility supports the future strategy development, and it requires rapid reaction towards the internal and external changes. The concept of strategic flexibility in product competitions is a fundamental approach to the management of uncer- tainty (Celuch & Murphy, 2010; Ghorban-bakhsh & Gho- lipour-kanani, 2018). The flexibility of strategy can offer the company a distinctive competitive advantage, due to the ability to make decision options, and various forms of stra- tegic flexibility. It aims to deal with dynamic and changing environments that may be difficult for competitors to emu- late (Sanchez, 1995). Factors that become the cause of SMEs must have strategic flexibility are; first, the development and improve- ment of digital technology utilization (digital network, use of access to the intensity, the use of smart phones, tablets, personal computers, and laptops in small business activi- ties). Internet usage is applied to SMEs such as in commu- nication with customers, payment transactions and products promotion or services, also known as market-sensing activ- ity (Celuch & Murphy, 2010). Second, SMEs must be able to deal with global competition that requires comprehensive problem solving skills, innovation and creativity (Schneider & Spieth, 2014). In addition, strategic flexibility also helps SMEs to manage risk management through both increased rapid response capability towards the current business prob- lems and to proactively design the future strategies (Grew- al & Tansuhaj, 2001). Strategic flexibility is also a key for SMEs to balance the internal and the external needs of the company to achieve competitive advantage, so that it can improve the performance. Workforce transformation is related with the creation of changes from a workforce to other forms that include the fundamental changes of a state, culture, behaviour and mind-set. In digital transformation, culture in the workforce context is needed, which emphasizes on achieving efficien- cy, forming awareness and engagement of workers to be able to adapt to the use of digital technology in accordance with the needs of the organization to develop its business (Ndayizigamiye & Khoase, 2018). Workforce transforma- tion in form of skills required, quality required, communica- tion, adoption of new social values, flexible and fluid, faster and more adaptive on daily basis, will support the growth of strategic flexibility. The study in agrifood nanotechnol- ogy by (Yawson & Greiman, 2017), found that workforce transformation conducted by human resource development is able to map future skill needs through skills training and development (identify best practice, learning and sharing knowledge, identification of opportunities and challenges ahead, and increased coordination and consultation for all stakeholders), so that it creates strategic flexibility for the company. Based on the results of the previous study, the hypothesis can concluded as follows: H1. There is a positive relationship between workforce transformation and strategic flexibility. Dynamic Capability and Strategic Flexibility Dynamic capability is related with the organization’s ability to adequately and timely adapt towards the chang- ing environments by reconfiguring the internal or external processes and resources, through the existing competencies (Eisenhardt & Martin, 2000; Gaur et al., 2014). The use of dynamic capability theory will allow a researcher to dis- mantle the big data results by simultaneously considering the routines. This aims for analysing the data and spread- ing knowledge to everyone in the organization (Rialti et al., 2019). Dynamic capability is the agent of evaluation and change that allows the company to assess what chang- es are needed for the resource base and their ability to re- main competitive, especially to face the changing market environment (Wilden et al., 2013). The absence of dynamic capabilities is seen as a threat that can hamper the compa- ny’s ability to maintain the performance level in new and constantly changing environments (Gnizy et al., 2014). Dy- namic capabilities are characterized by persistent long-term patterns of company behaviour that facilitate adaptation, but they do not directly affect the company’s performance. So it can be concluded that dynamic capability is an organi- zation’s ability to adapt with the changing environment for the resource base and their ability to remain competitive by spreading knowledge to everyone in the organization in a persistent long-term pattern. Gnizy et al. (2014) stated that dynamic capabilities could be measured from marketing program adaption, and local integration. Meanwhile Oliva et al. (2018) measured dynamic capabilities with integration of individuals’ exper- tise in the organization; culture, orientation and leadership; and company strategies. The other dimensions are the de- velopment of an entrepreneurial management (Teece et al., 69 O. Fachrunnisa, A. Adhiatma, N. Lukman, & M. N. Ab. Majid Journal of Small Business Strategy / Vol. 30, No. 3 (2020) / 65-85 2016), markets, technologies and regulations (Park et al., 2018) sensing (ability to identify new opportunities), seiz- ing (ability to absorb external knowledge and assimilate with prior knowledge), transforming (ability to transform knowledge into new products/services/systems/processes) (Tallott & Hilliard, 2016) the ability to identify and explore emerging opportunities and new sources of competitive ad- vantages (Bamel & Bamel, 2018; Schilke et al., 2018). So it can be concluded that, to measure or find out the dynamic capabilities, the dimensions are sensing capability, adaptive capability, innovation capability, networking capability, learning capabilities, integrating capabilities and coordinat- ing capabilities. Based on previous research, companies need to build strong dynamic capabilities to quickly create, deploy, and transform business models to remain relevant in the cur- rent digital economies (Teece, 2018; Teece & Linden, 2017; Velu, 2017). SMEs should be flexible, to always develop knowledge about changes in external environments by growing dynamic capabilities in organizational culture. An organizational culture that focuses on empowering dynamic abilities of workers is needed to create, deliver and capture value in the context of innovation in the digital age (Schall- mo et al., 2017). The example of high dynamic capability is the utilization of information technology conducted by SMEs. It helps to achieve the objectives more specifically, and can avoid coordination and sales transactions. Dynamic capability through the use of IT (Information Technology), also helps SMEs to develop strategic flexibility and to adapt towards their position in competition, to adjust and establish the connectivity between customer and competitor (Schnei- der & Spieth, 2014). As such, we hypothesize the following: H2. There is a positive relationship between dynamic capa- bility and strategic flexibility. Strategic Flexibility and Digital Transformation Strategic Flexibility refers to the company’s ability to respond to uncertainty by adjusting its objectives with the support of knowledge and superior capabilities. Strategic flexibility allows the company to support future strategy development, to react rapidly towards changes in internal and external. The concept of strategic flexibility in product competitions is a fundamental approach to the uncertain- ty management, including digital transformation (Sanchez, 1995). The flexibility of strategy offer the company a dis- tinctive competitive advantage, due to the ability to make decision options, and various forms of strategic flexibility in order to deal with dynamic and changing environments, which may be difficult for competitors to emulate (Sanchez, 1995). Therefore, strategic flexibility is a company’s ability to adapt towards a constantly changing environment in or- der to survive and continue to evolve in a new and higher level. Warner (2013) measured strategic flexibility with stra- tegic sensitivity, leadership unity and resource fluidity. The existing research proved that strategic flexibility has the potential to give positive impacts of technological capabili- ties. The impacts are in term of the exploration and shifting boundaries of the company’s exploration into a higher level (Zhou & Wu, 2010). In this digitization era, the company is encouraged to make a good change from traditional to digital. In order to realize these changes, it needs strategic flexibility, so that the company can respond to any form of uncertainty in order to realize the objectives of the compa- ny. Thus, the Hypothesis 3 is as follows: H3. There is a positive relationship between strategic flexi- bility and digital transformation. The Moderating Role of Agile Leadership In addition, we argue that successful strategic flexibil- ity and digital transformation is determined with the exis- tence of agile leadership. Agile leadership is an agile leader who can guide his team and continually influence the team behaviour by defining, spreading, and maintaining organi- zational vision (Perker et al., 2015). Agile entrepreneurs are obsessed with providing more value to customers. In an ag- ile organization, “customer focus” means that everyone in the organization has a clear view to the main customers and can see whether their work adds value to the customer or not (Denning, 2018). Marquest (2018) stated that the en- tire performance environment is the current fast- and agility is the key to stay in a business game. Leadership agility means agility in affecting people and make a change. Agili- ty is considered one of the main skills for current managers. An agile manager who has a lot of skills with flexibility and speed can facilitate the achievement of the success of larg- er organisations and prepare to face the challenges of the world today (Buhler, 2010). So it can be concluded that ag- ile leadership is an agile leader who can guide the team and continuously influence the team behaviour. So that the team always provide value to customers by having many skills with flexibility and speed in order to achieve the larger or- ganization’s success, and always ready to face the current world’s challenges. Perker et al. (2015) measured agile leadership as a form of leader capability to feel the sense of urgency and direction, hard work upfront – sets expectations and norms, shares responsibility and mutual accountability, effective in 70 O. Fachrunnisa, A. Adhiatma, N. Lukman, & M. N. Ab. Majid Journal of Small Business Strategy / Vol. 30, No. 3 (2020) / 65-85 recognising problems and making decisions, commitment and trust among members, balances individual and group needs, cohesive without stifling individuality, confronts differences and deals with conflicts, deals with minority opinions effectively, and effective communication methods. The agile leadership guidance consists of: intrinsic ability to face change; organizational views, adaptive systems; recognition of external control constraints; a humanistic, problem-solving approach; collective capability of autono- mous team as basic problem-solving mechanisms; limiting planning in advance to the minimum based on the assump- tion of uncertainty; adaptability; react based on the results from a self-managed team; and manage results (Gardner et al., 2005). The other dimensions of agile leadership include customer-first mind-set, focus on the road map for the fu- ture, continuous creation of new businesses, multiple paths to yes, willingness to take risks and acquire new institution- al skills, and turning institutional skills into new businesses (Denning, 2018). Meanwhile, according to Sanatigar et al. (2017) the dimensions to measure agile leadership are col- laboration and nurturance, accepting diversity, competency, innovation and creativity, transparency and trust, flexible structure, appropriate and smooth, regulations and direc- tives, new methods and processes for performing work, ro- bust – high speed and updated hardware and infrastructures, appropriate and timely software and programs. So it can be concluded that the dimensions to measure agile leadership are: shares responsibility, effective in recognizing problems and making decisions, adaptive systems, and flexible struc- ture. According to previous research results, an organiza- tion will have greater agility capability, if a leader use a far ahead and strategic perspective to make the best decision in the best time, and exert the best goal and plan by using their own initiative also the awareness and application of modern scientific methods related with work, in an envi- ronment which is filled with obscurity and uncertainty. Ag- ile leadership allows a congruence in the implementation of strategies, quickly articulates and creates a strategy into the choice of business logic, as well as infrastructure. The skills, system infrastructure, functions and processes are re- quired in articulating and prototyping essential strategies in preparing SMEs to quickly respond to the changing envi- ronments (Li et al., 2018). Thus, Hypothesis 4 is as follows: H4. Agile leadership strengthen the relationship between strategic flexibility and digital transformation Hence, the research empirical model (Figure 1) can be visualized as follows: Workforce Transformation Agile Leadership Dynamic Capability Strategic Flexibility Digital Transformation H1 H4 H3 H2 Figure 1. Empirical Model 71 O. Fachrunnisa, A. Adhiatma, N. Lukman, & M. N. Ab. Majid Journal of Small Business Strategy / Vol. 30, No. 3 (2020) / 65-85 Method Population, Sample and Data Collection A survey methodology is used in this research to col- lect primary data for empirical analysis. The samples used in this research were SMEs with high usage of simple digi- tal technology such as using social media for marketing and partnership purposes with clients and customer. The high usage of simple digital technology in this study is the SMEs who use at least mobile phones with internet connection in running their business. This is because the mobile phone is a simple digital technology that supports the use of the internet and social media (i.e., Facebook, Whatsapp, Insta- gram, etc) that facilitates access to information about vari- ous digital technology features. The population of this study were SMEs in Indonesia and Malaysia with industrial classification, which are in- cluded in a homogeneous-specific section that falls under the classification of small and home industries. The sam- ples in this study were SMEs with less than 300 employees, and sampling technique used in this study was non-random sampling with a purposive sampling method. They were composing company data and also collecting interest in- formation (e.g., type of industry, number of employees and annual sales) into an ad hoc database specifically for this research project (Table 1). In order to compile the primary data, the research as- sistants gave questionnaires to owner/leader/manager of 350 creative industries SMEs companies in Semarang – Central Java Indonesia and 350 companies in Terengganu Malaysia, as they have a strategic position in decision mak- ing related to information technology adoption. The criteria of SMEs selected as samples in this study are based on the development and adoption of (Badan Pusat Statistik (BPS), 2017; SME Corporation Malaysia, 2018; UU No. 20 Tahun 2008, 2008), referring to SMEs according to the world bank standard (World Bank Group, 2018) is business types with annual sales turnover of USD 100.000 - < USD 15.000.000, and full-time employees of 10 - ≥ 300 people. Additionally, Semarang as one capital city in Indonesia, and Terengganu as one capital city in Malaysia were selected as population targets since these areas have potential for the development of creative industry-based small businesses (bin Abdul Halim & Mat, 2010; Hapsari & Setiawan, 2019). Other se- lection criteria used in this research are SMEs who have used the internet in their part of business, with organization tenure more than one year (SMEs have been operating for at least one year). The SMEs creative industry sector was cho- sen as a sample because it requires the use of digital tech- nology (business development, production and distribution processes, and customer relationship) to develop innovation in their business (Li, 2018). SMEs creative industry sectors in this research, including fashion, retailer, service, food and beverages, handcraft as their part of creative industry. According to (National Creative Industry Policy (DIKN), 2018) Malaysia and (Badan Ekonomi Kreatif Indonesia, 2017) Indonesia, the creative industries definition refers to the United Kingdom’s (Departement of Culture Media and Sport (DCMS), 1998) “those industries which have their origin in individual creativity, skill and talent and which have a potential for wealth and job creation through the generation and exploitation of intellectual property”. The questionnaire contains some detail literature re- view on measurement scales and some questions that ad- dress workforce transformation, dynamic capability, strate- gic flexibility, agile leadership and digital transformation. The questionnaire also included a letter that requests the owners or senior managers or executives who acquire the topic of this study to complete the questionnaire. Before doing the survey, five owners of SMEs had personal interviews and the questionnaire validated first by a number of academics. The interview aims to improve the quality of items and correct the wording issues. Final- ly, after three months, a total of 519 usable surveys were collected. The majority of the respondents are owners and middle-level managers. The SMEs employed 5 – 300 staff and have between $100,000 (USD) and $15,000,000 (USD) in annual sales. Systematic measurement error and bias in the estima- tion of the true relationship among theoretical constructs can be caused by the self-report questionnaire data with a cross-sectional research design, common method variance from the measurement method rather than the constructs of interest (Podsakoff & Organ, 1986). Harman (1960) tests the existence of this problem in one-factor test (through exploratory factor analysis). This test provides substantial amount of common method variance, such as (a) a single factor from the factor analysis or (b) the majority of the co- variance among the variables of one general factor (Podsa- koff & Organ, 1986). The existence of six distinctive factors with Eigen values greater than 1.0 is shown by the factor analysis (principal component analysis with varimax rota- tion) on the questionnaire items. These factors are 77.2% of the total variance. Moreover, the largest factor is 29.8% of the total variance. Common method variance concern is unlikely to merge the interpretations of the results in this study. It is because there is more than one factor and specific factor for the total majority variance. In this study, the collection of data through the distri- bution of questionnaires arranged in stages based on a five- point Likert scale ranging from strongly disagree to strong- 72 O. Fachrunnisa, A. Adhiatma, N. Lukman, & M. N. Ab. Majid Journal of Small Business Strategy / Vol. 30, No. 3 (2020) / 65-85 ly agree. Measures Workforce Transformation We defined workforce transformation as a phenome- non among workers because of some external environment changing. We measure this variable with four items such as skill and qualities required from workforce, adoption of new social values, flexible and fluid, faster and more adap- tive on a daily basis. These items are developed by combi- nation from (Kucukusta et al., 2015; Liu, 2014; Shaugnessy, 2018; Stevens, 2018). Dynamic Capability Dynamic capability is defined as SMEs capability in responding to the rapid change of technology and market. The five-point Likert scale with four items from (Bamel & Bamel, 2018; Gnizy et al., 2014; Schilke et al., 2018) mea- sured dynamic capability. The items include sensing capa- bility, adaptive capability, innovative capability, networking capability, learning capabilities, integrating capabilities and coordinating capabilities. Strategic Flexibility We defined strategic flexibility as the company’s abili- ty to respond to uncertainty by adjusting its objectives with the support of knowledge and excellent ability. Multi-items adopted from (Warner & Wäger, 2019) to measure strate- gic flexibility. It includes four items, which are sensitivity, strategy, leadership unity, and resource fluidity. These items mainly relate to SMEs activities that permit the company to generate or adjust their business strategy flexibly. Agile Leadership We defined agile leadership as a leadership style that can give a fast response on business opportunities and threats which derive from changes and advances in informa- tion technology. The five-point Likert scale with four items from Perker et al. (2015) defined agile leadership are about share responsibility, effective in recognizing problems and making decisions, adaptive system and flexible structure. Digital Transformation Digital transformation is defined as organization trans- formation which integrates digital technology and business processes in a digital economy. The three items of (Warner & Wäger, 2019) are used to measure. Those three items are navigating the innovation ecosystem, redesigning internal structures and enhancing digital maturity. Results Demographic Respondents This study used 519 Indonesia and Malaysia SMEs as a sample. Demographics respondents in this study include; country, business fields, number of employees, and annual sales, as seen in Table 1. Table 1 Demographic respondents Detail Semarang, Indonesia Terengganu, Malaysia Total Sample (519) 280 239 Total Percentage Total Percentage Semarang 280 53.95 Terengganu 239 46.05 Business Field Semarang Terengganu Foods/Drinks 89 31.79 76 31.80 Craft 48 17.14 35 14.64 Fashion 76 27.14 68 28.45 Retailer 38 13.57 45 18.80 Service 29 10.36 15 6.28 Number of Employees Semarang Terengganu 5 – 10 150 53.57 136 56.90 ≥ 10 – 49 85 30.36 65 27.20 50 - 300 45 16.07 38 15.90 Annual Sales Semarang Terengganu ≤ USD 100.000 128 45.71 118 49.37 USD 100.000 - USD 3.000.000 83 29.64 67 28.03 USD 3.000.000 - < USD 15.000.000 69 24.64 54 22.59 In terms of country, 53.95% SMEs were from Indo- nesia and 46.05% were from Malaysia. The majority of re- spondents in this study were SMEs actors engaged in the food and drinks business (Terengganu 31.80% and Sema- rang 31.79%), then the fashion business sector (Semarang 27.14% and Terengganu 28.45%). The business sectors of Craft Semarang and Terengganu SMEs are (17.14% and 14.64%). While the Terengganu SMEs retailer business sector was 18.83% and Semarang was 13.57%. The re- 73 O. Fachrunnisa, A. Adhiatma, N. Lukman, & M. N. Ab. Majid Journal of Small Business Strategy / Vol. 30, No. 3 (2020) / 65-85 maining 10.36% and 6.28% are Semarang and Terengga- nu SMEs with service business. Most respondents (SMEs) Semarang (53.5%) and Terengganu (56.90%) have five – employees. Semarang SMEs with employees between 11 - 20 are 30.36% and 27.2% Terengganu SMEs. Then SMEs with more than 20 workers are only 15.90% Terengganu SMEs and 16.90% Semarang SMEs. Judging from the abil- ity of annual sales, the majority of Indonesian and Malay- sian SMEs have a production capability of < 100 (45.71% and 49.37%). Annual sales capability between 100 – 300 is 29.64% Semarang and 28.03% Terengganu SMEs. Where- as SMEs that have more than 300 annual sales capabilities are only (24.64% and 22.59%) Semarang and Terengganu SMEs. Descriptive Analysis All variables in this study were measured using a five- point Likert scale ranging from 1 = strongly disagree to 5 = strongly agree (Items of measures in Appendix). The mean score lower than two is rated as low, two to four rated as moderate, and higher than four is rated as high perception of understanding each variable (Radzi et al., 2018). The descriptive statistical values of this research are shown in (Table 2): Statistical Analysis and Hypothesis Testing The study used partial least squares (PLS) to analyse the research model. The software to conduct the analysis was provided by SmartPLS (Hair et al 2017). A variance- based on PLS approach is preferable to covariance-based methods, since PLS imposes less restrictions on sample size and distribution (Chin et al., 2003). PLS is defined as a SEM technique in which a measurement model and the theoret- ical structural model are simultaneously assessed (Chin et al., 2003). In addition, it is an equal method to resolve mul- ticollinearity problems that frequently arise in multivariate regression analysis, since PLS transforms predictor vari- ables to an orthogonal component called as PLS (Chin et al., 2003). Although the measurement prediction and struc- tural parameters happen simultaneously, the PLS model ap- plication typically occurs in two stages. The first stage is to assess the measurement model using confirmatory factor analysis also to estimate the reliability and validity of the theoretical constructs. Then, the second stage is to estimate the structural model tests of the (path) associations among the hypotheses in this research model. Measurement Model The initial stage before test measurement models test is to estimate the model (Figure 2). Evaluation of measure- ment models is used to test internal consistency (Cronbach Table 2 Descriptive statistics Variables Terengganu Semarang Mean SD Mean SD Work transformation 4.27 0.83 4.20 0.83 Dynamic Capability 4.26 0.78 4.24 0.74 Strategic Flexibility 4.15 0.96 4.07 0.93 Agile Leadership 4.3 0,85 4,34 0,85 Digital Transformation 3.88 1.01 3,97 0.98 Figure 2. Estimation Model 74 O. Fachrunnisa, A. Adhiatma, N. Lukman, & M. N. Ab. Majid Journal of Small Business Strategy / Vol. 30, No. 3 (2020) / 65-85 alpha and composite reliability); convergent validity (indi- cator reliability and AVE); and discriminant validity (For- nell-Larcker, 1981, Cross Loading, and HTMT). The test results of the measurement model of Figure 3 and Table 3 shows that the model is valid and reliable. The evaluation result of PLS models Algorithm run 1, the outer loading are more than 0.70, showing that all indi- cators of all variable are valid, then there is no indicators Figure 3. Measurement Model Evaluation Table 3 Measurement model evaluation Latent Variable Indicators (Appendix 1) Convergent Validity Internal Consistency Reliability Discriminant Validity Loadings AVE Composite Reliability Cronbach Alpha HTMT > 0.70 > 0.50 > 0.70 > 0.70 < 1 Workforce Transformation WT1 0.842 0.663 0.887 0.831 Yes WT2 0.801 WT3 0.819 WT4 0.793 Dynamic Capability DC1 0.824 0.624 0.921 0.899 Yes DC2 0.843 DC3 0.765 DC4 0.808 DC5 0.746 DC6 0.757 DC7 0.780 Strategic Flexibility SF1 0.875 0.734 0.892 0.818 YesSF2 0.843 SF3 0.851 Agile Leadership AL1 0.806 0.708 0.906 0.863 Yes AL2 0.854 AL3 0.846 AL4 0.858 Digital Transformation DT1 0.832 0.687 0.868 0.774 YesDT2 0.836 DT3 0.819 Moderating Effect AL*SFDT 1.706 0.734 1.000 1.000 Yes Source: SmartPLS Output 75 O. Fachrunnisa, A. Adhiatma, N. Lukman, & M. N. Ab. Majid Journal of Small Business Strategy / Vol. 30, No. 3 (2020) / 65-85 that needs to be eliminated. Reliability indicator shows the value of all indica- tor-loading factor of more than 0.70 and AVE values above 0.50. Internal consistency reliability demonstrates the value of Cronbach alpha and composite reliability of more than 0.70. To test the discriminant validity, Fornell-Larcker 1981 researchers used a matrix and HTMT (heterotrait-monotrait ratio of correlations) as suggested by (Henseler et al., 2016). In Fornell-Larcker 1981 matrix (Table 4), the value of the square root of AVE (diagonal) greater than all the values, and the value of HTMT (Table 3) is less than one. Hence, it can be concluded that the discriminant validity of the mea- surement models was confirmed. In order to assess discriminated validity, Fornell & Larcer (1981) stated that the square root of the AVE of a la- tent variable should be higher than the correlations among the rest of the latent variables. Table 4 shows, discriminat- ed validity holds for the model, as the square root of the AVE for each construct shows higher than the correlations among the variable construct. Table 4 Fornell-Larcker criterion Agile Leadership Digital Transformation Dynamic Capability Moderating Effect (Agile Leadership Moderates Strategic Flexibility on Digital Transformation) Strategic Flexibility Work Transformation Agile Leadership 0.841 Digital Transformation 0.567 0.829 Dynamic Capability 0.580 0.549 0.790 Moderating Effect (Agile Leadership Moderates Strategic Flexibility on Digital Transformation) -0.433 -0.184 -0.342 1.000 Strategic Flexibility 0.595 0.582 0.747 -0.420 0.856 Workforce Transformation 0.673 0.550 0.781 -0.356 0.766 0.814 Source: SmartPLS Output Structural Model Coefficient of Determination The coefficient of determination (Table 5) is used to measure the ability of exogenous constructs in explaining endogenous variable. The expected R² value criteria are be- tween zero and one. The result of R² value of all endoge- nous variables shows ability in predicting the model. The value of R² 0.75, 0.50 and 0.25 (Hair et al., 2017) show that the ability of endogenous variables in predicting models is (strong, moderate, and weak). It can be concluded that endogenous variables of stra- tegic flexibility and digital transformation have moderate abilities (0.434 and 0.644) in predicting models. It can be 76 O. Fachrunnisa, A. Adhiatma, N. Lukman, & M. N. Ab. Majid Journal of Small Business Strategy / Vol. 30, No. 3 (2020) / 65-85 said that exogenous variables (workforce transformation, dynamic capability) are able to predict (43.4%) endogenous variables of strategic flexibility, while the rest is influenced by other variables outside of this research. Exogenous vari- ables of agile leadership and strategic flexibility are also able to predict (64.4%) endogenous variables of digital transformation, while the remainder is influenced by other variables outside this research. Figure 4 shows the results of the structural model anal- ysis, showing the path coefficients along their significance levels. Path coefficient, t-value, and ρ-value for each hy- pothesis are shown in Table 6. Path coefficients describe the strength of relationship between constructs (latent vari- ables). This evaluation is similar to that of the regression coefficients. Analogous to the indicator weight analysis, the use of bootstrapping techniques allows for accessing each coefficient’s significance (Tenenhaus et al., 2005). H1 assesses a positive impact of workforce transfor- mation on strategic flexibility. Diamantopoulos et al. (2005) categorized path coefficients that are under 0.30 as the caus- ing moderate (effects), from 0.30 to 0.60 as strong, and up to 0.60 as very strong. Consequently, workforce transfor- mation establishes a strong, positive, significant effect on strategic flexibility (path coefficient = 0.469; t-value > 1.96; ρ-value < 0.001. If the company often transform their work- force, it will give the better chance to have strategic flexi- bility. The other result also arises dynamic capability, which has a strong, positive and significant effect on strategic flex- Table 5 Coeffecient of determination Endogenous Variable R² R² Adjusted Strategic Flexibility 0.434 0.431 Digital Transformation 0.644 0.643 Source: SmartPLS output Figure 4. Structural Model Evaluation Table 6 Path coefficient and effect size Path Coef t-value p-value f² Hypotheses Work Transformation  Strategic Flexibility 0.469 7.803 0.000 0.241 Supported Dynamic Capability  Strategic Flexibility 0.381 6.793 0.000 0.195 Supported Strategic Flexibility Digital Transformation 0.418 6.780 0.000 0.189 Supported Agile Leadership Moderates Strategic Flexibility  Digital Transformation 0.094 2.392 0.017 0.035 Supported Source: SmartPLS Output 77 O. Fachrunnisa, A. Adhiatma, N. Lukman, & M. N. Ab. Majid Journal of Small Business Strategy / Vol. 30, No. 3 (2020) / 65-85 ibility (path coefficient = 0.381; t-value > 1.96; ρ-value < 0.001). Therefore, H2 also confirm empirical support from the data. The result of H3 also confirm empirical support from the data. Strategic flexibility has a positive and signif- icant relationship on digital transformation (path coefficient = 0.418; t-value > 1.96; ρ-value < 0.001). In conclusion, strategic flexibility demonstrates a strong, positive, and sig- nificant impact on digital transformation. Finally, the results of H4 also confirm the moderated effect of agile leadership between strategic flexibility and digital transformation. The moderating effect shows the interaction between exogenous variables (predictor) and moderator variables in influencing endogenous variables (Baron & Kenny, 1986; Henseler & Fassott, 2010). Agile leadership as moderator variable of in- teraction between strategic flexibility on digital transforma- tion shows (path coefficient = 0.094; t-value > 1.96; ρ-value < 0.001). This result show that agile leadership has a mod- erate, positive and significant moderation effect on the inter- action between strategic flexibility to increase digital trans- formation. Effect size of f-square indicates that exogenous latent variables have a large influence (effect degree/ effect size) on endogenous variables, with criteria (0.02 = weak/ low, 0.15 = moderate, and 0.35 = strong/high) ((Baron & Kenny, 1986). The f² value in Table 6 illustrates the effect of workforce transformation, dynamic capability and stra- tegic flexibility have moderate effect on digital transforma- tion (0.241, 0.195, and 0.189). Figure 5 illustrated the graph of the moderating effect. These results represents effect of strategic flexibility on digital transformation under high and low levels of agile leadership, respectively. In the context of moderation effect, f² indicates what degree the moderation variable contribute to the explana- tion of the endogenous variable. The f² value suggested by Hair et al. (2017) from the f² classification is 0.005, 0.010, Figure 5. Graph of the Moderating Effect and 0.025 constitute more realistic standards for low, mod- erate, and high effect sizes, respectively. Table 6 explains that agile leadership as a moderating variable in the interac- tion between strategic flexibility and digital transformation, provides a high degree of moderation effect with a value of f² 0.035. Predictive Relevance (Q²) Cross-validated redundancy (Q²) is a method used to test predictive relevance. If the Q² value is higher than zero then the model has an accurate predictive relevance to a construct (Figure 6). The previous cross-validation test hypotheses commu- Figure 6. Predictive Relevance 78 O. Fachrunnisa, A. Adhiatma, N. Lukman, & M. N. Ab. Majid Journal of Small Business Strategy / Vol. 30, No. 3 (2020) / 65-85 nality and redundancy indices estimate the quality of the structural model. It means that the cross-validation (CV) communality global ensures that the quality of the structur- al model fit the indices are positive for all the blocks, con- sidering the measurement models as a whole. In addition, a metric to evaluate the quality of each structural equation is offered by CV redundancy index. This index should be pos- itive for all endogenous constructs (Tenenhaus et al., 2005). This study provides the models of equal and suitable pre- dictive validity since all the latent variables have values for cross-validation (CV) redundancy and commonality. Table 7 and Figure 6 shows the value of the Q-square all depen- dent variables more than 0. After analysing the quality of the structural equation, the next step is to examine the relationship among all con- structs. According to Chin (1998), bootstrapping (500 sub- samples) generates standard errors and t values. Figure 7 shows the results of structural model analysis and the path coefficients along with their significance levels. Path coeffi- Table 7 Predictive relevance Variable CV Commu- nality CV Redun- dancy Agile Leadership 0.503 Digital Transformation 0.365 0.286 Dynamic Capability 0.496 Moderating Effect 1 Agile Leadership*S- trategic Flexibility Digital Transformation 1.000 Strategic Flexibility 0.448 0.467 Work Transformation 0.433 Source: Output of SmartPLS cient and t value (sign) for each hypothesis shown in Table 6. Work Transformation Digital Capability Strategic Flexibility Digital Transformation Agile Leadership 0.469(7.803)*** 0.418(6.780)*** 0.388(6.063)*** 0.094(2.392)** RR²²==00..4433 RR²²==00..6644 Figure 7. results of the structural model **ρ < 0.05; *** ρ < 0.001 Discussion Workforce Transformation and Strategic Flexibility Workforce transformation establishes a strong, posi- tive, significant effect on strategic flexibility (path coeffi- cient = 0.469; t-value > 1.96; ρ-value < 0.001. If the com- pany often transform their workforce, it will give the better chance to have strategic flexibility. The result ensure that the existence of this kind of transformation – combining features of knowledge, skill and attitude of workforce – is antecedent to the strategic flexibility. This shows that the higher the level of ability to work transformation of SMEs (workers), has an effect on increasing the ability of SMEs to design strategic flexibility. The results of this study are in line with (Uimonen, 2016) which shows the ability of workforce transformation in the digital era influence strat- egy design. The results of the research showed that work- force transformation improves strategic flexibility. These initiatives mainly regard workforce as the main component in technology change (Ghobakhloo et al., 2012). In this case, a strong workforce transformation lim- 79 O. Fachrunnisa, A. Adhiatma, N. Lukman, & M. N. Ab. Majid Journal of Small Business Strategy / Vol. 30, No. 3 (2020) / 65-85 its the company to start the digital transformation through substantial investment and development initiatives in order to change the workforce mindset and behavior. This type of transformation leads the employees to believe that tech- nology disruption along with support from organization are basic for organizational transformation (Cha et al., 2015). Dynamic Capability and Strategic Flexibility H2 also admits empirical support from the data. Dy- namic capability, has a strong, positive and significant effect on strategic flexibility (path coefficient = 0.381; t-value > 1.96; ρ-value < 0.001). Dynamic capability features such as sensing capability, adaptive capability, innovative, network- ing, learning and integration between those capabilities also contribute to the development of strategic flexibility. Therefore, a greater tendency of firms focused on work- force transformation and dynamic capability for organiza- tional functioning and performance are likely to consider efforts devoted to development and support of the strategic capability by strategic sensitivity, leadership unity, and re- sources fluidity. SMEs owner and their leader need to build strong, dynamic capabilities to quickly create, implement and change business models to stay relevant in the emerging digital economy (Teece, 2018; Teece & Linden, 2017; Velu, 2017). Strategic Flexibility and Digital Transformation Strategic flexibility has a positive and significant rela- tionship on digital transformation (path coefficient = 0.418; t-value > 1.96; ρ-value < 0.001). The result of H3 also ad- mits empirical support from the data. Strategic flexibility demonstrates a strong, positive, and significant impact on digital transformation. A combination between strategic plan, leadership on strategy and resources of business rev- olution practices give positive relationships with digital transformation. Traditionally, this research demonstrates that strategic flexibility has a relation with digital transfor- mation (Celuch & Murphy, 2010) as new or existing com- bined leadership of strategy plan and implementation can contribute to either innovation or transformation (Schneider & Spieth, 2014). The Moderating Role of Agile Leadership Agile leadership as moderator variable of interac- tion between strategic flexibility on digital transformation shows (path coefficient = 0.094; t-value > 1.96; ρ-value < 0.001). This result show that agile leadership has a moder- ate, positive and significant moderation effect on the inter- action between strategic flexibility to increase digital trans- formation. Finally, H4 also confirms the moderated effect of agile leadership between strategic flexibility and digital transformation. The result of f² 0.035 represents that agile leadership is able to provide a high degree moderating ef- fect of the interaction between strategic flexibility and digi- tal transformation. Agile leadership moderates the relation- ship between strategic flexibility and digital transformation. As the hypotheses proposed, when a company has a greater tendency toward digital transformation, this company de- velops and supports a larger volume of flexibility to plan and implement a strategy, which then gives a positive im- pact to its digital transformation. The results show that agile leadership acts as a mod- erator in aligning the implementation of strategic flexibility and quickly articulating and designing a strategy in the log- ic of the business world, (Sanatigar et al., 2017). This sup- ports the study by Li 2018 and Steude 2017 that leadership helps improve the ability to adapt infrastructure and process of digital information systems, to deal with uncertainty and radical change in the business world. Conclusion and Implications Research on the best way to plan and implement orga- nizational factors to produce digital transformation is grow- ing, owing to this question’s theoretical importance and practical relevance for firms. Among these factors, strate- gic flexibility and agile leadership define a way to establish a clear direction for firms to resolve organizational tasks due to digital transformation (Callaway et al., 2009; Doz & Kosonen, 2010). This study shows that in digital era, work transformation and dynamic capability should also be es- tablished in order to create the conditions for adequate man- agement of digital transformation (Li et al., 2018). Furthermore, this research demonstrates the role of agile leadership as a moderating variable towards the en- hancement of digital transformation in their business envi- ronment. This can be achieved through a leader who is a visionary and thinks strategically in making decisions. In addition, a leader also needs to have initiative and aware- ness in implementing modern scientific methods because of the rapid and uncertain environmental changes. In the end, the company will be able to achieve higher agility. Work transformation has a positive and significant impact on strategic flexibility. Dynamic capability has a positive and significant impact on strategic flexibility. Furthermore, stra- tegic flexibility positively and significantly affect the ability of digital transformation. The findings illustrate that most SME actors already have agile leadership, strategy flexi- bility, workforce transformation and dynamic capability in 80 O. Fachrunnisa, A. Adhiatma, N. Lukman, & M. N. Ab. Majid Journal of Small Business Strategy / Vol. 30, No. 3 (2020) / 65-85 running their business. So that, it is expected that digital transformation will be faster. This flexibility combines the different elements of stra- tegic sensitivity, leadership capabilities and resource fluid- ity that encourage digital transformation. This is because the environmental change will bring a sensitivity on strate- gic evaluation. The main point of this finding is that SMEs should have capability to combine the practices of strategic flexibility and agile leadership in order to implement digital transformation. SMEs should have the capability to flexibly change the stress on these elements in accordance with the situation demands (Klein et al., 2017). Therefore, devel- oping an environment that encourages the use of strategic flexibility and agile leadership is an essential condition for managers to strengthen digital transformation. An additional contribution of this paper is to inves- tigate the relationship theories among workforce trans- formation, dynamic capability, strategic flexibility, agile leadership and digital transformation through an extensive literature review, and to anticipate some effects among these constructs. Indeed, it calls for additional research on how strategic flexibility and agile leadership can influence digi- tal transformation processes. In conclusion, this paper shows the effect of agile leadership and strategic flexibility in digital transforma- tion practices. The empirical evidence has important impli- cations for managers and marks the effects of moderating progress related with leadership factors in the relationship between strategic flexibility and digital transformation. However, this research has the following aspects of limita- tions. First, research design of this study is cross-section- al, and the research design is incapable of ensuring that the causal relationships set out in the hypotheses; even the results are consistent with theoretical reasoning. Further, researchers could solve this issue by applying a longitudi- nal design. Second, this study analyses strategic flexibility in the sense of strategy changes, leadership unity and re- sources fluidity. In addition, agile leadership is analysed through leader capabilities in sharing responsibility, recog- nizing problem and decisions making, adaptive system and flexible structure. Nevertheless, approaches that are more specific may be needed to take full advantage of those two processes in order to obtain distinct results when compa- nies find themselves in different contexts (e.g., environ- ment and time stage) (Rosing et al., 2011). Hence, when SMEs require creativity and experiment to face the rapid change scenario, a strategic flexibility and agile leadership may need other measurements. In this regard, future studies could try to analyse another type of strategic flexibility and agile leadership with different environmental or temporal settings. Third, self-report data is used by this study. It may suffer from the effects of general method variance. Future research could be useful from independently achieving and using objective measures of digital transformation. 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Workforce Transformation (adapted and developed from Stevens, 2018 and Shaugnessy, 2018) 1) My company always improves the skills of the workforce needed in accordance with the changing environment. 2) My company adopts new social values of the community to the workplace. 3) My company has regulations that are flexible and easily adapt to the conditions of the business environment. 4) My company’s human resources are always faster and more adaptive in responding to changes in digital technology. 2. Dynamic Capability (adapted and developed from Bamel & Bamel, 2018; Schilke et al., 2018; Gnizy et al., 2014) 1) My company is able to feel the changes in the business environment periodically so that the products or services we provide are as expected by customers. 2) My company is able to adjust to changes in the business environment. 3) My company able to create innovation with changes in the business environment. 4) My company is able to form a network with changes in the business environment. 3. Strategic Flexibility (adapted and developed from Warner & Wäger, 2019) 1) My company has a strategic sensitivity facing the dynamics of the business environment. 2) My company has a core team that is reliable at making bold and fast decisions, without getting caught up in the top-level “win-lose” politics. 3) My company has an internal ability to modify resources quickly. 4. Agile Leadership ( adapted and developed from Perker et al., 2015) 1) I always share responsibilities with members of my company. 2) I have the ability to recognize problems to make decisions. 3) I always ready to face all challenges in the changing business environment. 5. Digital Transformation ( adapted and developed from Warner & Wäger, 2018) 1) My company emphasizes the use of digital technology in its business activities. 2) My company summarizes some of its business processes because it switches to the use of digital technology. 3) The company increases the mastery of digital technology in its business processes.