Digital transformation has advanced rapidly in recent years, contributing to MSMEs’ growth while simultaneously intensifying market competition. This dynamic environment highlights the critical need for digital transformation to improve business performance. However, many MSMEs face challenges in formulating and implementing effective digital strategies. This study examines the role of digital strategy and market competition in driving digital transformation to enhance MSME performance. A quantitative approach was adopted, using a Likert-scale questionnaire distributed to 154 MSMEs in Bandung. Data were analyzed using Partial Least Squares-Structural Equation Modeling (PLS-SEM). The findings suggest that digital strategy and market competition have a significant impact on digital transformation, which in turn enhances MSME performance. However, digital strategy does not directly affect performance without the mediating role of digital transformation. This study theoretically contributes to the understanding of digital transformation in improving MSME performance by asserting that digital strategy and market competition play a crucial role in driving digitalization.