The primary goal of this thesis was to theoretically and empirically examine the impact of digital transformation on innovations and the competitive advantage of companies, as well as their interrelationship. In contemporary business environments, digital transformation represents a crucial process of integrating advanced technologies into business models and operational processes, enabling companies to enhance their adaptability to market conditions, increase efficiency, and drive innovation. A company’s competitive advantage is often based on its ability to innovate and respond swiftly to changes in the business environment. In this context, digital transformation plays a vital role by enabling companies to adopt new technologies and approach innovations in a way that allows them to differentiate themselves in the market or achieve cost leadership. The research thus focused on analyzing how the application of digital technologies affects the competitive capability of companies, defined as an internal strength that enables the creation of a competitive advantage. The research was conducted on a sample of companies from Split, using survey questionnaire for data collection. The results indicated that digital transformation positively influences the competitive advantage of companies, as evidenced by increased innovation activity and improved operational efficiency. The first hypothesis (H1), which assumes a positive correlation between the degree of digital transformation and the competitive advantage of companies, was confirmed through data analysis. The second hypothesis (H2) confirmed that companies that have undergone digital transformation demonstrate a higher level of innovation compared to traditional companies. The third hypothesis (H3) showed a strong correlation between the level of innovation and the competitive advantage of companies, where innovation is crucial for the long-term maintenance of market position. The analysis of the results achieved the research objective, providing insight into the importance of digital transformation as a strategic tool for achieving and maintaining competitive advantage. Although all hypotheses were confirmed, further research could focus on studying specific sectors and the long-term effects of digital transformation on business performance.