<![CDATA[This study examines how handicraft micro, small, and medium-sized enterprises (MSMEs) operating in a traditional market develop dynamic capabilities under conditions of resource constraint, relational embeddedness, and uneven digitalisation. Using a qualitative case-study design, data were collected from ten owners and managers of handicraft MSMEs in Beringharjo Market, Yogyakarta, through semi-structured interviews, non-participant observations, and business documentation. Data were analysed using reflexive thematic analysis, cross-case comparison, and abductive reasoning, with sensing, seizing, and transforming used as sensitising concepts rather than predetermined coding categories. Seven interrelated themes emerged: relational market sensing, calculated experimentation, incremental resource reconfiguration, relational capability as strategic capital, selective digital adaptation, heterogeneous pathways to competitiveness, and learning through failure. The findings reveal a distinctive adaptive mechanism in which market changes are sensed primarily through customer and business relationships, opportunities are seized through low-risk experimentation, and resources are transformed through cumulative micro-adjustments rather than radical restructuring. Digital technologies complement these processes by extending relational reach and information flows rather than replacing established market relationships. The study develops a relational-incremental microfoundation of dynamic capabilities, demonstrating how strategically meaningful adaptation can emerge from informal, resource-conscious, and socially embedded practices. These findings extend dynamic capability theory into the context of traditional-market microenterprises and challenge assumptions that effective SME adaptation necessarily depends on extensive formalisation or comprehensive digital transformation.]]>
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