Recently, the importance of the service sector has increased, and the sector now produces a substantial part of the global economy’s gross domestic product (GDP). Based on current evidence, the service sector will continue to grow significantly in the coming years [1
]. Additionally, firms in the service sector face the continuous challenge of operating in unstable environments. Therefore, digital transformation (DT) and innovation are essential for firms to develop an effective competitive strategy [2
In 2016, Saudi Vision 2030 was launched to shape the future for the Kingdom of Saudi Arabia (KSA) and its citizens. The plan aims to shift the KSA from an oil-dependent economy to a knowledge-based economy. To achieve the goals of Saudi Vision 2030, the National Transformation Program 2020 was introduced to establish the needed capacities and capabilities, and DT is an integral part of this program, which is meant to be implemented throughout the Kingdom across all sectors, including non-profit, public, and private organizations. In addition, digital infrastructure development is also among the program’s commitments. However, Saudi Arabia is only in the initial stages of DT and Saudi organizations still have work to do to achieve DT, and thereby contribute to Saudi Vision 2030 [3
Digital technology is gradually becoming important for achieving business goals. It is a way of obtaining differentiation and competitive advantage; consequently, managers’ interests in DT are increasing [5
]. However, the focus in DT literature has been mostly on DT as a concept and the adoption process, with some studies conducted on DT effects on firm performance [6
]. In another stream of research, groups such as Ukko et al. [7
] have examined DT through two main dimensions, namely managerial capability and operational capability. These dimensions were built based on existing research in this field [8
]. The researchers found that managerial capabilities significantly impact performance when mediated by a sustainability strategy.
Nevertheless, Martín-Peña et al. [11
] found that digitalization has a direct strong positive relationship with the sales performance of industrial firms, in addition to its mediating role in the relationship between servitization and performance. In contrast, Kharlamov and Parry [12
] concluded that digitization has no direct impact on the performance of British publishing firms in financial terms; however, it does have an effect when combined with servitization. Therefore, previous research has shown mixed results regarding the relationship between DT and performance measures.
To our knowledge, academic work in the area of DT and firm performance has not yet been extensively explored in Saudi Arabia, a context that shows high growth and digital transformation rates in relation to other developing countries, particularly in the service sector. In addition, previous research has called for investigating how DT influences firm performance in different contexts and sectors [13
]. Moreover, understanding which channels can explain how DT influences firm performance is worth understanding. Some proposed channels through which DT can influence firm performance are IT innovation and customer experience. Those factors are particularly important within in-service sectors, where service delivery methods and customer experiences play a vital role in the success of any organization. Previous literature has examined these relationships in different contexts. For example, Sturesson and Groth [15
] studied the effect of DT on patient care in the medical sector in Sweden, and Hess et al. [16
] examined the options for articulating DT strategies in German companies across different sectors. However, DT literature is generally limited in developing countries such as Saudi Arabia, and it is important to study this concept within such a context. Al-Ruithe et al. [3
], for instance, inspected cloud computing as an enabler of DT in the Saudi public sector, but, as far as we know, studies have yet to examine the paths through which DT influences a firm’s performance.
Customer experience (CX) is an essential service sector factor influencing a firm’s performance. The literature broadly agrees that a consistent customer experience yields a firm’s positive outcomes [17
]. Furthermore, in recent research, customer experience has been specified as a new source of competitive advantage predictive of customer loyalty [19
], and eventually influencing firm performance [17
]. However, the literature on customer experience, for the most part, has focused on studying specific aspects of customer experience, such as customer consumption experience and reactions, in terms of thinking, feeling, sensing, and acting, customers’ relationships with brands, customer satisfaction, and service quality [20
]. Consequently, improving customer experience can be considered a strategic method to improve a firm’s performance [21
Equally, innovation is the main competency for firms to survive in dynamic and competitive environments, maintain competitive advantages, and improve performance [22
]. Furthermore, within the factor of innovation, IT is becoming a fundamental element and the main driver of change in business processes. It enables innovation and innovation adoption, as well as process management. Thus, IT innovation is now an important research topic as well. However, efforts on this topic are only in the early stages [23
]. Most of the innovation literature has focused on the innovation of products and processes [25
], and employee innovation behavior [26
]. Our knowledge of IT innovation still needs to be improved. Thus, more attention should be directed to the effects of IT innovation on firm performance and how digital transformation influences IT innovation. In addition, studies have highlighted the emphasis in innovation literature on the manufacturing sector, as well as the lack of focus on the service sector. Though some progress has been made to address this research gap, a bias in IT innovation research remains, suggesting a general interest in IT innovation in the manufacturing sector, but an interest in non-technological innovation in the service sector [27
]. Thus, this study aims to examine the effect of digital transformation (DT) on both customer experience and IT innovation, influencing the performance of service sector firms. More specifically, we aim to examine the above relationship in a developing country, where the service sector plays a big role in its economy [29
4. Analysis of Biographical Information
The firms and participants of the current study are described according to four variables: industry type, firm age, participants’ education level, and work experience. The sample results illustrate the distribution of participating firms according to industry type. Aviation firms comprised the largest share, with 27.3% accounting for the firms surveyed. The banking sector share was 9.7%, and the health sector represented 9.1% of the total sample. The technology industry comprised 7.3%, and the financial sector share was 6.7%. Other industries accounted for 2.4% to 4.8%, comprising 23.6% of the responses.
The results show the illustrated firms’ ages, and it is clear that the majority (75.8%) had been in business for more than 20 years: 13.9% of the firms were aged between 11 and 20 years, 6.1% were less than five years old, and 4.2% were between 5 and 10 years old.
The sample shows that 46.1% of the participants held a higher degree (Master’s or a PhD), 48.4% held a bachelor’s degree, and 5.5% were educated at a high secondary or diploma level. Therefore, most of the participants in the current study were well-educated.
The sample shows that most study participants (46.7%) had between 10 and 20 years of experience, 24.8% had 20–30 years of experience, 17.6% had less than ten years of experience, and 10.9% had over 30 years of experience. Therefore, most of the participants had an experience that enabled them to assess the impact of digital transformation.
4.1. Descriptive Statistics
The descriptive statistics in this section aim to assess participants’ attitudes toward the main variables of the study. The means and standard deviations of participants’ attitudes are illustrated in Table 4
shows participants’ perceptions of DT implementation in the service sector in Saudi Arabia. The overall mean value reaches 4.27, with a standard deviation of 0.62. This mean value indicates that most private sector firms implement digital transformation in their business operations. Therefore, Saudi service sector firms have adequate managerial and operational capabilities. The mean values reach 4.41 and 4.13, indicating positive circumstances.
The results in Table 5
illustrate respondents’ perceptions of the customer experience within the service sector in Saudi Arabia. The overall mean value of customer experience is 3.65, with an SD of 0.72. This mean value indicates that most respondents agreed that customer experience is enhanced with the new technology advances. Therefore, DT changes the procedures of managing firms’ operations based on the new technology implemented to improve customer experience.
The analytical results of participants’ responses to experience design and analysis indicate that service sector firms focus more on experience design and information analysis related to customer interactions that reflect their needs and wants.
shows respondents’ perceptions of IT innovation use in Saudi Arabia’s service sector. The results reveal that the overall mean value is 4.12, with an SD of 0.66. This mean value indicates that service sector firms often use IT innovation in business operations.
Furthermore, it shows that the three variables of IT innovation, IT technology, intra-organization, and inter-organization, achieve mean values that extend between 4.05 and 4.19, which indicates that service sector firms have shown continuous success in keeping up with the modern IT innovations and implementing these innovations to support their business operations. Therefore, participants agreed that their firms had a high level of IT innovation.
The results in Table 7
illustrate participants’ perceptions of the firm’s performance based on the effect of DT in the service sector in Saudi Arabia. The results reveal that the overall mean value of firm performance is 3.84, with an SD of 0.78. This mean value indicates that DT clearly affects a firm’s performance. Service sector firms are taking real steps to adopt actual transformation in their policies, procedures, and functions to obtain the advantages of technology and innovation. Therefore, adopting DT in service sector firms has positively improved firms’ performances.
4.2. Results of Testing Research Hypotheses
4.2.1. Results of Testing Hypothesis One
A simple regression analysis was run to test this hypothesis, and the results are shown in Table 8
The results in Table 8
show that the F
-statistic is 77.02 and statistically significant at 0.01, indicating that simple regression, including digital transformation as an independent variable, effectively estimates changes in customer experience if other factors remain unchanged. Furthermore, the coefficient determination (R2
) is equal to 0.321, meaning that DT effectively predicts approximately 32% of changes in customer experience.
In addition, the results reveal that the regression coefficient of the independent variable digital transformation is 0.656, which is statistically significant, as the p-value is less than 0.01. These results show that DT has a significant positive effect on customer experience, thereby supporting the acceptance of H1, which proposes that digital transformation positively affects customer experience.
4.2.2. Results of Testing Hypothesis Two
A simple regression analysis was conducted to determine if there is a positive relationship between DT and innovation, and the results are presented in Table 9
The results in Table 9
show that the F
-statistic is 118.92 and statistically significant at 0.01, indicating that simple regression of DT as an independent variable effectively explains the changes in IT innovation if other factors remain unchanged. Furthermore, the coefficient determination (R2
) equals to 0.422, meaning that DT effectively predicts approximately 42% of IT innovation changes.
In addition, the results in Table 9
suggest that the regression coefficient of the independent variable digital transformation is 0.689, which is statistically significant, as the p
-value is less than 0.01. This result suggests a significant and positive relationship between DT and IT innovation in the service sector in Saudi Arabian firms. In addition, the correlation coefficient value equals to 0.649, indicating a positive relationship between the two variables. Therefore, the results support the acceptance of H2, which predicts that DT positively affects IT innovation.
4.2.3. Results of Testing Hypothesis Three
A simple regression analysis was run to examine whether digital transformation positively affects firm performance, and the results are presented in Table 10
The results in Table 10
show that the F
-statistic is 63.33 and statistically significant at 0.01, which indicates that the simple regression of DT is efficient in predicting changes in a firm’s performance if other factors are unchanged. In addition, the coefficient of determination (R2
) is equal to 0.280, meaning that DT can predict 28% of changes in a firm’s performance on average.
In addition, the results in Table 10
show that the regression coefficient of the independent variable digital transformation is 0.666, which is statistically significant, as the p
-value is less than 0.01. This finding suggests that DT positively affects firm performance in the Saudi service sector. In addition, the correlation coefficient value between the two variables equals to 0.529, meaning that a positive relationship exists between DT and firm performance. Consequently, the above results support the acceptance of H3, which predicts that DT positively affects firm performance.
4.2.4. Results of Testing Hypothesis Four
A simple regression analysis to test this hypothesis is illustrated in Table 11
The results in Table 11
reveal that the F
-statistic is 105.652 and statistically significant at 0.01, which indicates that the simple regression of customer experience is efficient in predicting changes in firm performance if all other factors are unchanged. In addition, the coefficient of determination (R2
) equals to 0.393, indicating that customer experience can predict approximately 39% of variations in firm performance.
The illustrated results also show that the regression coefficient of the independent variable customer experience is 0.576, which is statistically significant, as the p-value is less than 0.01. This result suggests that customer experience has a significant impact on firm performance. In addition, the correlation between the dependent and the independent variables equals to 0.627, which supports the relationship between customer experience and firm performance. Therefore, customer experience is important as one of the determinants of firm performance. Furthermore, existing literature supports the acceptance of H4, which predicts that customer experience positively affects firm performance.
4.2.5. Results of Testing Hypothesis Five
A simple regression analysis was performed to test this hypothesis, and the results are presented in Table 12
The results in Table 12
reveal that the F
-statistic is 88.614 and statistically significant at 0.01, indicating that the simple regression of IT innovation is efficient in predicting changes in firm performance if all other factors are unchanged. In addition, the coefficient of determination (R2
) equals to 0.352. Therefore, innovation can predict approximately 35% of variations in firm performance.
Furthermore, the results show that the regression coefficient of the independent variable IT innovation is 0.500, which is statistically significant, as the p-value is less than 0.01. This result suggests that IT innovation significantly positively affects firm performance. Moreover, the correlation between the dependent and the independent variables equals to 0.593, which supports the relationship between innovation and firm performance. Furthermore, this finding suggests that IT innovation can predict long-term firm performance. Therefore, the previous evidence supports the acceptance of H5, which predicts that IT innovation positively affects firm performance.
The current study aimed to examine the effects of digital transformation (DT) on customer experience and IT innovation, and its direct influence on firm performance in the service sector. Five hypotheses were proposed to test the different framework factors.
The analysis shows a significant positive effect of digital transformation on customer experience, indicating that successful adoption of digital transformations will enhance the customer experience, supporting previous studies’ results [33
The results also indicate that digital transformation significantly positively affects IT innovation, which shows that effective digital transformations can enhance a firm’s IT innovativeness. Since digital transformation involves the adoption of technology, and IT innovation is any innovation facilitated by technology [73
], this result is in line with studies that have shown that IT infrastructure and technology adoption positively affect firm innovation [40
In addition, examining the digital transformation effects on firm performance reflected a strong positive effect, i.e., successful digital transformation will result in improved firm performance. This result is consistent with most studies examining the effect of digital transformation, digitization, or technology adoption [44
In contrast, Chae et al. [74
] surprisingly found that IT capabilities do not affect a firm’s financial performance, neither through profit nor cost. He justified this by the fact that IT capability lost importance due to reduced IT costs, outsourcing, and ready packages. However, this cannot be true in the case of digital transformation because, as discussed earlier, DT is a strategic process that is more than just implementing technology.
However, productive digital transformation enhances customer experience, customer satisfaction, and customer loyalty. Overall organizational innovativeness also increases productivity and reduces costs [5
]; thus, it leads to competitive products and services, increased customer retention rate, market share, and healthier profitability, i.e., improved firm performance.
Furthermore, the analysis indicates that customer experience significantly positively affects firm performance. In other words, a better customer experience will be translated accordingly into better firm performance. This finding aligns with the literature [50
]. Clearly, enhanced customer experience results in better word-of-mouth and increased purchase intentions, customer satisfaction and loyalty, leading to improved performance, i.e., market share, retention rate, and profitability [48
Moreover, the results demonstrate a significant positive effect of IT innovation on firm performance. Therefore, enhanced IT innovation will improve the performance of firms, which supports earlier studies [53
6. Research Contributions
6.1. Theoretical Contributions
The results of this study will serve as theoretical contributions to this field’s literature. Existing studies have discussed DT and its effects on firms’ performances across many sectors. However, they need to expand on its significance in the service sector, particularly in developing countries such as Saudi Arabia. The current study empirically supports that DT predicts customer experience, IT innovation, and its direct influence on firm performance. Second, customer experience and IT innovation positively influence firm performance. Third, the vital role that DT needs to play in the process of implementing service delivery innovation practices, especially in industries such as the service sector, is crucial. In addition, as a result of its management and organizational capabilities, it can contribute to a firm’s performance as a whole. Thus, our theoretical contribution is to expand on the role of DT, customer experience, and IT innovation on firm performance. As technologies emerge in the service industry, competition becomes more and more challenging. The relationship between digital transformation, customer experience, and IT innovation has become increasingly close.
Finally, the findings of this study are of great value to researchers and academicians, since they provide more insight and information about the impact of DT on firm performance and two dependent variables (customer experience and IT innovation). Moreover, the results could be useful for other research demonstrating that firm innovation influences firm performance [75
]. In particular, the study represents a starting point for further research aiming to extend and replicate its findings in other countries or sectors with different levels of management experience.
6.2. Practical Contributions
The study findings identify the capabilities firms can focus on to enhance DT and the competencies needed to improve customer experience and IT innovation, and gain a competitive advantage in the marketplace. Moreover, this study offers firms a holistic view of key capabilities for more effective and efficient performance.
In addition, DT plays a crucial role in implementing service delivery innovation practices, especially in the service industry. As a result of its managerial and organizational capacities, it contributes to the performance of the firm. For example, top management must consider the role of IT managers in innovation initiatives.
Lastly, the study findings apply to any service organization, public or private, and any service-manufacturing firm.
7. Limitations and Future Research
This empirical study considered only the service sector. Future research could consider different industry sectors and/or different countries to explore the impact of DT in other markets and economies. This would help build an in-depth understanding of the conformity, similarity, and contrast between sectors and countries. Additionally, regarding the measurement of firm performance, the study used only one factor, without distinguishing financial from non-financial performance, due to the time limitation. At the same time, the data used to measure firm performance are subjective due to each firm’s control over what real performance information is shared and how that information is presented. Therefore, researchers may consider a multi-factor measure for firm performance that includes financial and non-financial measures, providing a broader view.
Furthermore, studies could examine the level of employees’ digital literacy as a moderating role during the digital transformation period, as it has been shown to enhance positive outcomes [76
]. Another area of research that could be explored is to examine the possible mediating roles between DT and firm performance, such as managers’ competencies, where previous research has called for a digital training program to improve the knowledge of organizations’ employees [77