Small—and medium-sized enterprises (SMEs) within the hospitality sector increasingly focus on their business operations following green practices. Implementing best practices to withstand competitive pressures and adapt to market expectations is essential. The aim of this study is to examine the effects of strategy agility, digital capability, and entrepreneurial competencies on sustainable competitive advantages with open innovation as the mediating role. Grounded in the resource-based view theory, a research model is proposed. Using snowball sampling, 288 SMEs operating in the green hotel business in Malaysia were analysed using partial least squares-structural equation modelling (PLS-SEM). The results indicated that strategy agility, digital capability, and entrepreneurial competencies positively affect sustainable competitive advantages. Open innovation plays a crucial mediating role in relationships. The findings demonstrate that the growing reliance on strategy agility, digital capability, and entrepreneurial competencies continues to influence open innovation, affecting sustainable competitive advantages. The implications highlight the importance of achieving sustainable competitive advantages in the hospitality industry.