Abstract
The digital transformation of UK manufacturing has emerged as a critical policy priority, yet Small and Medium Enterprises (SMEs) continue to struggle with adoption of Industrial Digital Technologies (IDTs). This paper draws on a meta-review of 47 research projects from the £4.4 million InterAct Network to develop a theoretical framework for understanding these persistent implementation challenges. We identify a temporal and spatial mismatch: while policy operates through abstract future scenarios, SMEs require concrete, immediate pathways for change. Our ‘stepping stones’ framework reveals four critical mechanisms that enable successful digital adoption: collective skills development, co-opetitive business models, trusted local intermediaries, and peer-to-peer learning networks. These mechanisms function within place-based ecosystems that bridge the gap between national policy ambitions and firm-level realities. The framework challenges conventional assumptions about technology diffusion by demonstrating that digital transformation requires not just technical solutions but careful attention to the social infrastructure of change. Our reading of the UK’s 2025 Industrial Strategy suggests growing policy recognition of these principles, though significant implementation challenges remain. The paper contributes to place-based development theory while offering practical insights for policymakers seeking to accelerate manufacturing innovation in local economies.
Keywords
Introduction
Despite significant investment in UK digital transformation initiatives, the majority of manufacturing SMEs remain reluctant adopters of industrial digital technologies, creating a persistent gap between policy ambition and business reality. This paper presents a critical reflection on the findings from a comprehensive meta-review of 47 research projects funded from InterAct Network, a £4.4 million Made Smarter Innovation initiative. We examined the challenges and opportunities in supporting Small and Medium Enterprise (SME) adoption of Industrial Digital Technologies (IDTs) within UK manufacturing. The InterAct programme, following existing research in innovation studies (Geels, 2004; Smith et al., 2010) explicitly recognised that barriers to Industrial Digital Technology (IDT) adoption were not primarily technical but fundamentally social, organisational, and territorially embedded. As the research team commissioned to conduct a comprehensive meta-review of InterAct’s funded projects, we occupied a unique position to observe patterns and key insights through the synthesis of the knowledge created, shared, and applied in this space. This article presents our reflections on these insights and provides a contribution to both theoretical understanding of place-based innovation and practical insights for policy implementation.
Research published in this journal has long examined the relationship between place, institutional context, and the competitive fortunes of manufacturing firms. Dawley et al. (2010), writing on regional resilience in the aftermath of industrial restructuring, established that sustainable adaptation requires not simply firm-level resourcefulness but deliberate institutional leadership capable of coordinating responses across the local economy – a finding that prefigures our own argument about the indispensable role of trusted intermediaries. More recently, Tripathi et al. (2024), examining traditional manufacturing sectors in the West Midlands, demonstrate how enabling and constraining contingencies, such as the quality of institutional support, the stability of supply chain relationships, and the volatility of the policy environment, interact to shape firm competitiveness in ways that purely firm-level analysis cannot capture. Their call for policy that is participatory, farsighted, and proactive, and their documentation of the damage done by successive rounds of institutional upheaval from Regional Development Agencies through to Local Enterprise Partnerships and Combined Authorities resonates directly with the ecosystem stability arguments at the heart of our stepping stones framework. Taken together, these contributions establish that the fate of manufacturing SMEs is not determined within the firm alone, but is deeply shaped by the quality, continuity, and local embeddedness of the support infrastructure surrounding them.
Beyond digital adoption, studies have consistently shown that the translation of national policy into firm-level action is far from automatic, and that gaps between policy aspiration and business reality are structural rather than incidental. Baranova et al. (2020) provide a framework for understanding these structural failures in their study of SME engagement with the UK’s clean growth agenda in the East Midlands, specifically they identify a place-policy-practice nexus characterised by three persistent gaps: between policy design and local context, between policy intentions and support practice, and between support provision and the situated realities of firms. Their finding that only a small minority of SMEs had integrated clean growth into their growth strategy, with many describing national policy as offering nothing relevant to them, is a direct empirical precursor to our own analysis of the disjuncture between digital transformation policy and firm-level response. Reynolds et al. (2022), examining digitalisation in the Welsh foundational economy, identify a comparable digital dissonance in which the promise of digital technologies articulated at the national level systematically fails to translate into adoption by small firms that constitute the backbone of local economies; a failure they attribute to barriers of finance, human capital, and supply chain embeddedness that place-blind policy cannot address. It is into this conversation that this paper intervenes, offering not only further evidence of the macro-micro disconnect but a framework, or stepping stones approach, that identifies the specific mechanisms through which place-based, peer-to-peer ecosystems can begin to bridge it.
To conceptualise these mechanisms more explicitly, we draw on the theory of change (ToC) perspective, widely used by policy makers to evaluate how interventions are expected to contribute to outcomes (Mayne, 2023). A ToC framework goes beyond describing activities or intended results by showing the causal pathways through which change is expected to occur, offering a way of mapping and visualising the process of change from intervention to outcome. In doing so, it identifies and makes sense of the conditions and context that must hold for these pathways to work (Mayne, 2015, 2017, 2023). In this sense, a ToC framework reflects an understanding that interventions are only one part of a wider ‘causal package’, and that outcomes depend on whether key supporting conditions are realised in practice.
In its basic form, a ToC maps a process that links activities and outputs to a sequence of changes, such as shifts in capabilities, behaviours, and ultimately outcomes, showing how an intervention is expected to contribute to these results (Mayne, 2015). Crucially, it also identifies the key conditions that need to be in place for each step in this process to work in practice, for example, whether firms have the capacity, motivation, or opportunity to act on new knowledge. This reflects the insight that interventions do not operate in isolation but depend on a wider set of enabling factors. As a result, change is rarely linear and may be influenced by feedback effects, external conditions, and unintended consequences. By making these pathways and conditions explicit, ToC provides a practical way of representing the complexity and uncertainty inherent in policy interventions.
For policymakers and practitioners, this provides a practical tool for understanding where and why interventions may succeed or fail. Rather than assuming that policy intent will translate directly into firm-level change, ToC highlights the specific conditions, such as capabilities, institutional support, and coordination across actors, that must be in place for change to occur. By revealing and visualising dependencies, ToC helps identify gaps between policy design and on-the-ground realities, highlighting where coordination or institutional support is needed to enable change. This is particularly valuable in the context of SME digital transformation, where adoption depends on interconnected capabilities, relationships, and local support structures. The stepping stones framework we develop builds on this logic, offering a place-sensitive way to understand and support the incremental pathways through which SMEs engage with digital technologies.
We use a ToC lens to interpret the InterAct evidence base, identifying how different projects illuminate specific stages and conditions within the digital transformation process. This enables us to move from abstract policy intent to empirical pathways of change.
Summary of 47 InterAct-funded research projects, grouped by thematic area.
Notes. Call types: SLR = Structured Literature Review; ECR = Early Career Researcher; AIF = Actionable Insights Fund; Open Call = Open Funding Call. Projects were funded across five call types (2021–2024) involving 20+ UK academic institutions. Thematic classification reflects meta-review coding by the authors. Source and resources are available at: InterAct Hub – Pioneering human insight for industry.
Our methodological approach combined systematic thematic analysis of project outputs. Using NVivo software, we employed paired coding to identify patterns across projects, synthesise key drivers and barriers, and map relationships between macro-level drivers and micro-level adoption decisions. This process led to the development of our emergent theory of change (Klag and Langley, 2012), subsequently validated through stakeholder consultation with InterAct project leads and a presentation at the programme’s final workshop in February 2025. The synthesis of findings enabled identification of patterns and insights that would not have been visible in individual studies, while the involvement of diverse research teams across multiple institutions provided triangulation of findings across different methodological approaches and theoretical perspectives. In keeping with our theoretical framing which we outline below, we storyboarded our insights, during the final workshop in February 2025 (see Figure 1). Summary of emergent theory of change for IDT adoption by SMEs.
Findings: Macro-micro disconnects and a problem of materialising the future
At a macro-level, our analysis identified four principal drivers creating pressure for transformation in UK manufacturing; the need to reverse low growth and low productivity in the UK economy, respond to the promise of new (and disruptive) technology, address sustainability challenges, and skills and workforce shortages. Within policy there has been a specific emphasis on finding solutions to the long-standing UK problem of equitable economic growth, driven by low productivity and lack of investment, compounded by global economic shocks, and geographic and generational inequalities. The subsequent policy imperatives, including those from Made Smarter and most recently the Industrial Strategy (Department for Business and Trade, 2025), have been consistently and often exclusively focused on the promise of technology. IDTs such as additive manufacturing, AI/ML/AR, and robotics/process automation are perceived as vital skill sets within the UK economy, offering compelling potential benefits including improved operational efficiency, enhanced flexibility, sustainability gains, and firm and industry-level competitive advantage. In addition, sustainability challenges, around resources and the climate emergency and evident in the regulatory environment, have created urgent demands for more efficient, sustainable manufacturing processes, for example, circular economy initiatives. At the same time, there are recognisable and long-standing demographic and skills challenges within the workforce, including ageing, and difficulties attracting younger workers into manufacturing. Taken together, these macro-level drivers are seen to require an economic and societal transformation that is digital (and green).
Despite these powerful macro-level drivers, our examination of SME experiences across the 47 projects revealed persistent barriers to digital adoption. SMEs consistently face a lack of resources – financial and more significantly human capital and leadership resource – to support digitalisation. There is insufficient internal expertise to evaluate, implement, and manage new technologies highlighting a lack of absorptive capacity which is a long-established issue within SMEs (Cohen and Levinthal, 1990). This lack of change capacity and capability is compounded by financial constraints around capital availability, reflecting the broader and ongoing challenges facing SMEs in accessing innovation finance since the financial crash (Cowling et al., 2012; Lee et al., 2015). There is also uncertain return on investment, and fear of costly implementation failures, which creates significant risk aversion. Further, there are severe trust deficits around the technology itself, including scepticism of what is being sold by technology vendors, amidst uncertainty about solution appropriateness, and concerns about vendor lock-in. This lack of trust is symptomatic of a broader information asymmetry with confusion about available support options, funding mechanisms, and technology choices (see Choi et al., 2020). At the firm level, resource constraints interact with process deficiencies and capability gaps to create formidable barriers to digital adoption. It is thereby unsurprising that SMEs with concerns about disrupting existing operations, customer relationships, and established routines are reluctant adopters of digital technology at scale, and at times suffer from organisational inertia.
However, our analysis revealed that the intensity and manifestation of these barriers is fundamentally shaped by local context. Contrary to assumptions about the placeless nature of digital technologies, successful adoption is profoundly place-dependent. Local contexts, including industrial heritage, institutional arrangements, social networks, and cultural norms, determine not just whether SMEs encounter these barriers, but how severely they experience them and what resources are available to overcome them. This represents a disjuncture between macro drivers and policy aspirations, and the response at the micro or firm level that goes beyond simple policy translation or SME capability problems.
The abstract nexus for change contrasting with the immediate operational realities of SMEs
First, there is little doubt that the drivers are creating a ‘nexus for change’ that SMEs are experiencing directly and daily. However, in many instances, problems and solutions are focused on a yet to be imagined digitalisation and sustainable future. In other words, there is intense pressure for change, but the prescriptions are largely being articulated in the abstract. When UK manufacturing firms encounter the drivers for digital and sustainable transformation, their nexus for change exists not in the abstract realm of imagined futures in policy documents or even the future promises of technology as a transformative force, but in the immediate operational realities they confront daily. Importantly, the strategic middle distance, that crucial scenario planning horizon where firms traditionally chart paths to future possibilities, has been progressively eroded. The 2008 financial crisis, the COVID-19 pandemic, and most recently the emergence of generative AI has successively compressed strategic planning horizons, rendering the intermediate steps toward digital transformation increasingly indistinct. This is different from responding to policy changes or dealing with normal strategic practice of fundamentally uncertain futures because of the scale and immediacy of the change required.
There is increasing difficulty of connecting abstract macro-level drivers with the concrete operational concerns of manufacturing SMEs. The temptation is either ignoring uncertainty or removing the threat in imaginary (and usually exclusively positive) scenarios (Wright, 2005), as we see in some of the prescriptions of the technology providers or in the magic futures in policy. We suggest the challenge facing SMEs is a significant temporal compression in strategic planning horizons that is not addressed in the myriads of current policy prescriptions nor necessarily in the current ‘off the shelf’ forms of scenario planning tools and roadmaps. Instead, what is then critical is the absence of the daily coping and narrative space to deal with the present challenges not simply as abstract futures (Bazzani, 2023; Bryant and Knight, 2019; Tutton, 2023; Valentine and Hassoun, 2019), that would support SME leadership to cope with uncertainty through practical and informed strategic action (see Greenman and Holstein, 2023).
Towards a stepping stones theory of change: An emergent framework
Materialising the future and recognising the need for a bridge
Our meta-analysis confirms existing research that SME digital transformation is still highly problematic, notwithstanding technology push (supply-side pressures from new technological capabilities) and market pull (demand-side pressures from market needs) as drivers of innovation adoption (Dosi, 1982). Our insight is that what is required in support of such macro drivers is a recognition that the issue of adoption is compounded by temporal compression and spatial diffusion of any response, hence the need for a bridge (see Figure 1). Our conceptualisation also incorporates that the scale of the challenge facing SMEs is one that often requires or even threatens a transformation in business model, where there is a perceived lack of trust and support.
Making the case for a place-based peer-to-peer ecosystem
Digital transformation is not localised within a single organisational function but manifests across multiple domains of a firm’s competitive operating environment, including in supply chain relationships, internal processes, customer interfaces, and business model configurations. Digital transformation must be navigated within a complex web of enablers and constraints that span firm boundaries, connecting what were previously discrete organisational challenges into systemic interdependencies. In addition, firm-level action is dependent on ecosystem-level factors that also fundamentally shape adoption possibilities. The degree of digital maturity among available workforce populations creates enabling or constraining conditions that individual firms cannot address on their own. Workforce development thus becomes not simply a firm-level human resource challenge but a regional economic development priority requiring coordinated responses across educational institutions, employers, and public agencies. In other words, temporal compression coincides with spatial diffusion of any responses to innovation drivers, beyond the control of individual SMEs and even their supply chains.
What is required is the development of what we term a place-based peer to peer ecosystem whereby locally embedded support systems make adoption feel both feasible and attractive. In this we adopt a contemporary interpretation of future making to bring ‘the future into the present’ as a narrative and affective endeavour (Bazzani, 2023; Bryant and Knight, 2019; Oomen et al., 2021; Valentine and Hassoun, 2019). This is because the daily coping and narrative space to materialise the future in the present to support SME leadership to cope with uncertainty, in peer-to-peer learning, is critical (Greenman and Holstein, 2023). This conceptualisation also builds on work by scholars like Autio et al. (2014) on entrepreneurial ecosystems, and innovation systems (Cooke, 2001; Lundvall, 2007) defined more recently as an ‘evolving set of actors, activities, artifacts, institutions, and relations, including complementary and substitute relations that are important for the innovative performance of an actor or a population of actors’ (Granstrand and Holgersson, 2020: p.90).
Practical insights – Toward a stepping stone theory of change
Central to our emergent theory is the concept of stepping stones, that is four practical insights on how to bridge the gap between macro-level drivers and micro-level adoption realities and make the abstract actionable for SMEs, in a place-based peer-to-peer ecosystem.
First, addressing skills as a collective challenge is essential
Individual SMEs struggled to address skills gaps independently, but collective approaches can prove more effective (Bailey et al., 2010). Examples might include sharing training costs, rotating staff between companies for experience, and collaborating with local colleges to design relevant programmes. These collective skills strategies coordinate and share SMEs investments. Skills development should be framed as a collective challenge requiring collaborative solutions rather than individual firm responsibility. Given the tendency for digital transformation to drive SMEs toward what can be characterised as co-opetitive business models, that is approaches where companies collaborate to compete rather than competing in isolation (Brandenburger and Nalebuff, 1996).
Second, a conscious supporting narrative shifting from competitive to co-opetitive models is required as the way to support SMEs within the ecosystem
The emergence of co-opetitive business models has challenged traditional assumptions about competition and cooperation in innovation systems (Gnyawali et al., 2006). Conventional models tend to treat competition and cooperation as distinct modes of interaction, we contend there is a more fluid boundary between collaboration and competition than these models assume. SMEs may simultaneously compete while collaborating for example resource sharing in waste streams, equipment usage, and logistics, or collective platforms enabling shared procurement and innovation costs, as well as collective problem-solving, including as previously mentioned, skills consortiums where competitors collaborate on workforce development.
Third, within the ecosystem there is a critical role for trusted intermediaries
We clearly observed the importance of local and trusted innovation intermediaries; organisations that SMEs already knew and trusted within their business communities. These were not necessarily technology specialists but possessed social capital within local manufacturing networks. Manufacturing associations, chambers of commerce, and regional economic development agents proved effective at driving adoption. Echoing established practice on the role of intermediaries (see Howells, 2006 for a synthesis of the literature in this field) rather than creating new and remotely located technology-focused organisations, there is a need to invest in building the digital capabilities of existing intermediaries that already possess SME trust and engagement.
Fourth, the power of demonstration and peer learning is fundamental
Finally, a consistent finding across the 47 InterAct projects was that SME decision-makers were most effectively moved toward digital adoption not by expert advice, but by seeing what their peers had done. Properly sponsored spaces for peer reflection and learning, prioritising horizontal knowledge exchange between SMEs rather than vertical transfer from experts to users, proved critical to bridging the gap between abstract possibility and practical action (Baranova et al., 2020; Greenman and Holstein, 2023; Lowe et al., 2021). This effect was strongest in settings that combined storytelling with hands-on experience: facilitated site visits, user groups, and maker and demonstrator spaces where the future could be encountered concretely rather than described in the abstract. The implication for policy is that investment in these infrastructures of peer encounter; not simply in technology access or financial incentives; should be treated as a first-order priority rather than a supplementary activity.
An evolving policy landscape: Industrial strategy as embodied learning
The publication of the UK’s Modern Industrial Strategy in June 2025 provides an opportunity to examine how these research insights might translate into and inform policy development. Our analysis suggests that many of the principles identified through the InterAct meta-review are reflected in the Strategy’s design (Department for Business and Trade, DBT 2025), with several elements of the strategy directly reflecting the stepping stones approach that emerged from our analysis. For example, the Strategy’s commitment to reducing electricity costs for manufacturing industries and providing enhanced investment support addresses the immediate operational concerns our research identified as crucial for building SME confidence in digital transformation. The explicit recognition that the strategy is ‘place-based, recognising that stronger regional growth is critical’ (p.22) with an emphasis on ‘partnerships between industry, unions and the Government’ and a focus on ‘strengthening the whole environment around them and promoting the spillover of capital and innovation between them’ reflects our findings about the need for a collaborative, ecosystem-based approach. However, the Strategy’s success will depend on whether regional implementation recognises that digital transformation cannot be mandated from Westminster but should be cultivated through the building of local trust networks and peer learning infrastructures.
Implications for policy to support the local economy
Our analysis extends beyond the immediate context of UK manufacturing digital transformation and contributes to broader theoretical debates about place-based development, innovation systems, and policy implementation. Framed through a theory of change (ToC) perspective, these insights can be understood as specifying the pathways and enabling conditions through which digital transfomation is expected to occur in local economies. The stepping stones framework building on sociology of the future scholarship to reinterpret scenario planning (Wack, 1985a, 1985b) in Knightian uncertainty Knight, 2009 (1921), also addresses what Barca et al. (2012) identify as the ‘missing middle’ in place-based policy design, the gap between abstract national strategies and concrete local implementation. According to the ToC perspective, the ‘missing middle’ corresponds to the under-specified and under-explored intermediate stages and conditions that connect policy inputs to firm-level outcomes. Our conceptual contribution is significant because we provide a mechanism for understanding how macro-level policy drivers can be translated into micro-level business decisions through territorially embedded interventions. Rather than assuming automatic transmission of policy intentions to strategic action within them, our ToC framework highlights that such translation depends on a sequence of interdependent step and conditions requiring active intermediation through trusted local institutions, the space for and demonstration of immediate operational benefits, and progressive future shaping capability building that respects the pace at which established SMEs can absorb and implement change. We provide empirical support for the continued importance of proximity in innovation processes, even as digital technologies ostensibly render geography less relevant (Granstrand and Holgersson, 2020). Our findings demonstrate that digital technologies do not operate in a spatial vacuum but require local institutional arrangements, trust networks, and collaborative infrastructures for successful adoption. These can be understood as critical enabling conditions within our ToC for digital transformation; Our framework provides insight into how digital transformation intersects with territorial development, suggesting that the relationship between technology and place is not one of substitution but of co-constitution, each shaping and being shaped by the other. In this sense, the stepping stones framework offers a place-based ToC that makes visible how these interactions unfold over time.
These theoretical insights translate into several principles for effective place-based digital transformation policy. From a ToC perspective, these principles can be seen as ways of strengthening key links and conditions within the change process. First, the principle of subsidiarity is key. While national strategies should provide frameworks and resources, detailed shaping and implementation must be devolved to regional and local levels where specific industrial contexts and uncertain futures, can be understood and narrated. This reflects the need to align interventions with locally specific conditions that underpin successful pathways. This is not simply a matter of administrative convenience but reflects the fundamental insight that effective interventions must be adapted to local institutional arrangements, industrial structures, and networks. Second, rather than creating new institutions, policy should invest in strengthening existing local organisations that already possess SME trust and engagement. These actors play a critical role as intermediaries in ensuring that the conditions required for change are realised. Third, policy design must embrace ecosystem thinking, recognising that digital transformation challenges cannot be addressed through individual firm interventions but require collective approaches that span multiple organisations and institutions. This principle is particularly important for addressing skills gaps, developing shared infrastructure, and building the collaborative business models required to bridge the macro/micro divide. Such ecosystem approaches help to stabilise and reinforce the wider set of conditions on which successful change depends. A large part of this ‘system’ is creating the coping and narrative space to materialise the future in the present.
Conclusion and further research
The InterAct experience demonstrates that successful digital transformation in manufacturing SMEs requires more than technology access or financial support. It demands understanding and working with the social, organisational, and territorial contexts in which SMEs operate. The stepping stones approach offers a framework for bridging the persistent gap between macro-level policy drivers and micro-level adoption realities and recognises the need for a bridge between the abstract into the actionable, which needs to be the central focus of policy. In line with a ToC perspective, this highlights the importance of identifying and supporting the intermediate steps and conditions through which policy ambitions and intent are translated into practice.
The implications of our work may benefit beyond manufacturing and beyond the UK, given that economies worldwide each grapple with digital transformation challenges. Notwithstanding the specific characteristics of UK manufacturing SMEs, we point to the importance of place-based approaches that leverage local assets, relationships, and institutional arrangements, which might be examined in further research. Comparative analysis of how place-based digital transformation approaches work in different national and regional contexts would help establish the boundary conditions for our findings and identify which principles transfer across contexts and which require adaptation. Such work could also examine how different place-based theories of change operate across contexts and where key assumptions or conditions differ
Footnotes
Funding
The authors disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This work was supported by the UKRI Made Smarter Innovation Challenge and the Economic and Social Research Council via InterAct [Grant Reference ES/W007231/1].
Declaration of conflicting interests
The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.