Strategic analysis of digital transformation for manufacturers considering innovation and digital technology spillover in a competitive environment

Digital transformation is imperative for sustainable manufacturing in the digital era. However, it heightens competition, creating a dilemma between overinvestment and underinvestment, with inevitable digital technology spillovers further complicating market dynamics. This study investigates a supply chain comprising a single supplier and two competing manufacturers. A dynamic game model is employed to analyze the impact of manufacturers’ digital transformation and the associated technology spillover effects on market competition, and to explore the optimal digital transformation strategies and responses of supply chain participants in a competitive environment. The findings are as follows. First, a manufacturer who leads in digital transformation can gain a competitive advantage and expand market share, and the follower can also recover lost share through digital transformation. However, specific digital transformation strategies should be determined based on the availability of financial resources, consumers’ value perception, and digital spillover. Second, digital transformation reshapes pricing strategies, as the transformed manufacturers can adopt digital value-oriented or cost-oriented competition depending on the market and technological conditions. Moreover, digital technology spillover exerts dual effects, weakening differentiation yet fostering win–win outcomes under moderate investment. Finally, suppliers in a monopolistic position adjust wholesale prices strategically and also benefit from the overall expansion of digitalized supply chains.