SMEs are in the midst of a digital economy driven by the rapid growth of technologies, pushing them to change or be excluded from the system. Compounded by the COVID-19 outbreak, SMEs are required to catch up with the transition quickly. Governments and policymakers have previously conceived numerous policies to support SMEs' digital transformation in most countries. Nevertheless, in Indonesia, these efforts are dominated by digital literacy development programs while paying little attention to the holistic entrepreneurial capacity. Whereas only as a part of a comprehensive approach digital literacy can be developed. As SMEs are part of a system, the holistic entrepreneurial capacity should encompass internal and external capacity, from SMEs' capacity as an entity, the availability of enabling environment, and the synergy. This research attempted to solve the research question: "How to raise the SMEs' capacity in Indonesia to perform digital transformation?". The proposition was studied by carrying a multiple embedded case study of Indonesian SMEs to determine the existing capacity, barriers and ultimately answer the research question. The case study includes 18 SMEs with different business scales assorted into three categories according to the entrepreneurial capacity and digital literacy level. Data collection in this case study combined semi-structured interviews and observations. Additionally, three inclusive case descriptions are presented to illustrate the profile of targeted companies in the Government's digital transformation agenda. Furthermore, cases were cross-analyzed to reveal their capacities based on the value and institutional context of each company, and also the relation to its digital transformation phase. Meanwhile, data about the current landscape and the interaction with SMEs are collected from a literature review and interviews with four experts from Kemenkop, Bank Indonesia, and eCommerce. The empirical results reveal that Indonesia's current landscape is shifting within traditional and more modern practices. Numerous policies, regulations, development programs, and financial supports exist to boost SMEs' digital transformation. However, there are manifold barriers at this level. There is a solid patrimonial system and bureaucracy in a decentralized Government system, compounded by a sectoral ego that creates disintegration and hampers coordination. In addition, the lack of arrangement and regulations enforcement due to the Government's limited capacity generates suboptimal outputs. Next, lack of capacity is the central barrier to digital transformation at the SME level. However, the empirical evidence showed that this issue is beyond the lack of knowledge and skills in technology utilization. Hence, capacity building should not only concentrate on improving digital literacy but also the overall SMEs’ capacity. Another noteworthy finding is that some SMEs with high capacity prefer to stay out of the systems and refuse to take digital transformation due to weak regulations enforcement from authorities and lack of incentives. On the other hand, SMEs utilizing digital technology both in transition business model and digital business model obtain several benefits from their participation. First, they enjoy the broader market and network up to national also international markets. Such a network will also lead to cost savings and access to funding. Next, they can have better engagement with customers that contribute to their innovation capacity. Then, combining the broader market, network, and customer interaction enables SMEs to create demand-based innovation, leading to the better product value. Participating in the digital platform and the motivation for business escalation also affect the SMEs' compliance level. As they try to develop the business and increase the product value, they will register their business and strive to obtain relevant certifications. Ultimately, with intensive assistance and consecutive improvements, the company's overall performance would be enhanced, and in turn, this will promote business sustainability. This study confirms that SMEs' digital transformation requires comprehensive knowledge and skills, a supporting mindset, and enabling environment. Therefore, we propose a comprehensive SMEs development program for the Indonesian Government, namely SCALE-UP: SMEs Capacity Development and Upgrading Program. This program is a top-down approach for the Government and relevant authorities that focus on providing appropriate capacity building for SMEs according to their needs reflected on capacity assessment output. So, the capacity development between SMEs might vary. The traditional enterprises with a lack of capacity in most aspects will get different development plans than the SMEs with higher entrepreneurial capacity but lack digital literacy, as they need a more entrepreneurial mindset and attitude. This capacity development should be followed by intensive assistance and collaboration with civil society. Eventually, regular evaluation and more vigorous enforcement are essential to monitor progress and anticipate obstacles. Nevertheless, this development program requires more transparency, cooperation, and compliance within Government institutions. To deal with the sectoral ego, a dedicated working group for SMEs development consisting of the Government and relevant authorities is required. In addition, the Ministry of SMEs and Cooperative, as the SMEs authority, can build a showcase of progressive SMEs that is accessible for investors, financial institutions, NGOs, and relevant stakeholders. This showcase can be an incentive to encourage SMEs to take digital transformation and participate in the formal economy voluntarily.