This study examines how Japanese small and medium-sized enterprises (SMEs) are leveraging digital transformation and employee empowerment to explore new business opportunities amid a severe labor shortage. As sales recover following the COVID-19 pandemic, enhancing productivity and maintaining global competitiveness have become critical. Beyond quantitative labor issues, qualitative approaches such as motivating younger employees and fostering inclusive workplaces are gaining importance. Through a case study of Iwasaki Co., Ltd., a manufacturing SME in the metal processing industry, this paper highlights initiatives that combine internal capabilities with digital tools, such as integrated supply chain systems and smartphone-based product promotion platforms. The company’s efforts to empower foreign and female employees with advanced IT skills and to build a supportive work environment demonstrate how internal human capital can be aligned with innovation strategies. Drawing on these insights, this paper also conducts an empirical analysis using survey data from SMEs to explore the factors that contribute to successful business expansion. The findings emphasize that employee engagement and external collaboration, through joint product development, study sessions, and direct customer interactions, play crucial roles in driving entry into new business domains, especially in AI and digital fields. The study concludes that developing digitally competent personnel, including foreign professionals, will be essential for the sustained growth of SMEs in Japan.