Business Strategy and Digital Transformation: Evidence From China

ABSTRACT This study examines the relationship between firms' business strategy (BS) and their digital transformation (DT) processes. Utilizing data from Chinese publicly listed companies spanning 2007 – 2020, the research reveals that companies following a prospector strategy pursue DT more intensively than those adopting a defender strategy. This finding remains robust across different sample compositions, alternative measures of DT and BS, and instrumental variable (IV) regressions. Mechanism analyses reveal that these strategic differences operate through three organizational channels: risk‐taking culture, governance structure, and managerial incentive time horizons. Prospectors exhibit higher risk tolerance, more flexible governance arrangements, and longer term managerial incentives—all of which facilitate greater DT engagement. This study advances the understanding of DT by demonstrating that firms' transformation trajectories are systematically shaped by their strategic orientation, thereby providing a strategy‐based perspective that complements and extends existing technology‐ and resource‐based explanations.