The COVID-19 pandemic accelerated technology adoption globally, laying the foundation for artificial intelligence-driven (AI) transformation. However, South African small and medium enterprises (SME) in the clothing and textile sector have not fully leveraged this shift to enhance business model (BM) innovation. Despite AI's potential to improve operational efficiency, adoption remains low due to implementation uncertainty and a lack of strategic frameworks (Hansen & Bogh 2021; Park et al. 2019; Varaniūtė et al. 2018; PwC 2017; Ponnapalli 2022).

A critical post-COVID research gap exists around AI and Internet of Things (IoT) integration in SME BMs, particularly in developing economies. This study addresses this gap by designing a theoretical AI-based BM strategy for clothing and textile industry SMEs. A qualitative, exploratory methodology was adopted to examine how AI can enhance decision-making and improve core business functions when combined with key performance indicators (KPIs) and IoT capabilities. The research builds on the work of Serumaga-Zake and van der Poll (2021), emphasising the role of strategic innovation and institutional support in enabling SME participation in the Fourth Industrial Revolution (4IR). Sampling included SME case profiles and industry literature to inform three key BM components: Value Creation, Value Delivery, and Value Capture.

The model was developed using interpretive synthesis and thematic analysis. Tools such as AI process mapping, KPI frameworks, and IoT value-chain touchpoints were employed to identify areas where digital solutions could maximise customer reach, communication, satisfaction, and financial sustainability. Findings reveal that AI-integrated BMs can help SMEs adapt to evolving consumer demands and strengthen market resilience. Value Creation focused on brand reputation and customer segmentation; Value Delivery explored AI tools for improved information sharing and client communication; and Value Capture addressed sustainable revenue and relationship management. These factors were structured to support agility in adapting to digital platforms, technologies, and trends.

The study concludes that AI and IoT offer significant potential to reconfigure SME BMs in South Africa. However, affordable AI solutions remain underutilised. The proposed framework provides actionable recommendations for SME adoption and scalability, offering transferable principles across sectors. Practically, it serves as a guide for SMEs seeking to implement AI in their operations. Theoretically, it lays a foundation for future research on digital transformation in fashion and other creative industries within developing economies.