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The Value Chain of Digital Business

Nowadays, companies like Audi and HSBC, use IT systems in everything they do. Does that make them to be IT companies rather than banks? Most would probably agree that HSBC is a bank, just as Audi is a car manufacturer. But what about digital banks such as Chime or companies offering digital products? In digital companies, most of the employees work with developing software. Are they not, therefore, IT companies? No, they are not but their primary activity is software development.

Porter, in introducing his famous value chain model, divided the activities of a company in primary and support activities. The primary activities are those that are of utmost importance in adding value and giving the company a competitive advantage. Support activities, on the other hand, are those that support the primary activities to make them more efficient.

In Porter’s Value Chain, the primary activities consist of inbound logistics (managing inbound input from suppliers), operations (the processes that convert the input to products), outbound logistics (getting the products to the customers), marketing and sales (selling the products), and service (management of post-sell activities). Porter’s value chain has a heavy emphasis on movement of products. In the value chain, technology, including software and software development, is a supporting activity.

The software development process of digital companies has moved from being a support activity to become a primary activity. The software development process has become so permeated the value chain that they are inseparable. Just as a car manufacturer seeks to continuously improve their manufacturing processes, digital companies must continuously improve their software development processes. Failing to do so, can result in lagging in an ever-competitive business environment and that threaten their very existence.

How does the value chain of a digital company look like? Digital companies do not have raw materials and components to be managed with inbound logistics. Rather, they have to consider what product feature to develop or what improvement opportunity to realize. Such decisions are taken based on, for instance, data on user behavior, competitor’s offerings, and trends. The inbound logistics of all these ideas are managed as a strategic portfolio, involving strategic business analysis. When decision has been taken to realize an idea, traditional business analysis commences. The business analysis serves to provide sufficient basis, based on for instance, feasibility and financial viability, to take a decision. If a positive decision is taken, the feature becomes an item for the software development process. With the new feature in production, data is gathered and used as input for product service such as bug fixes and minor improvements. Marketing and sales remain the same for the digital as in the original value chain.

The Value Chain for Digital Companies

In light of this context and value chain, two observations can be made.

Many software development processes begin when the IT team has been given a set of user stories to develop. Although analysis is part of the value chain, it is treated as a separate function. One way this is expressed, is that most developers use Jira for tracking issues whereas the business analyst do not. If one seeks to improve the value chain – the process beginning with an idea until the final output is evaluated – one must collect data and track all parts. Otherwise, the improvements will be confined to just one part of the value chain. No matter how efficient that part is, the end result still suffers.

Some digital companies apply agile methodology but only for their software development. When the agile methodology is confined to the IT department, the organizational structure of the company holds the benefits of agile hostage. Digital companies need agility across all parts of their value chains. By restricting agile methods to pure software development, the benefits of agile business analysis are restricted.

In short, by re-thinking the value chain of digital companies, opportunities for data-driven improvement of idea-to-service process, resulting in better agility and efficiencies. 

Fredrik Milani
Lecturer of Information Systems
University of Tartu

[email protected]


This entry was published on Dec 03, 2019 / Digital Business Analysis. Posted in Business Process Management (BPM) . Bookmark the Permalink or E-mail it to a friend.
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Rich Anderson posted on Friday, February 14, 2020 1:48 AM
You might want to have a look at the IT4IT standard from the Open Group. They have developed a value chain model for IT that could also serve as a proxy for a company producing digital products. They have also defined a reference architectecture that describes the application services and data stores that automate the IT Value Chain. This is way more than just "Agile", but rather something more like Lean manufacturing for IT. Highly recommended.
Rich Anderson
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