Digital transformation: How are traditional value chains changing?

What does 😉 actually “hide” behind digitization and digital transformation?

Let's start from the beginning today:

While digitization refers to the partial or complete replacement of analog service provision with digital, computer-controlled models, the digital transformation is still going much further. According to Dahm and Holst (2020:225), it describes “[the] change process of a company in all its areas with the aim of improving existing products or processes or inventing new products by using new technology, networking new and previously used objects and creating a supportive corporate culture. ”

These two definitions illustrate the difference between the two buzzwords and show that digitization is now only a tool for implementing digital transformation and that there will be profound changes within companies and along the entire value chains.

But what do these changes look like?

Phew, that sounds like dry theory at first, but it is relevant to our common understanding: First, value chains should clearly differentiate between internal (vertical) and overarching (horizontal). Digital transformation has a significant impact on both value chains.

The vertical value chain

We are already seeing these changes up close and personal every day while working at 55BirchStreet. It is inspiring to see which measures small and large companies that we can support are already implementing and how the vision of companies is adapting to the fast-moving world. We are pleased to be part of this long, demanding, but also exciting journey and to be able to provide support activities with the help of IT systems, for example, as this leads to a Networking of data and processes within a company is coming. It can be assumed that primary activities will gradually develop by gradually integrating individual value-added processes into a comprehensively networked system, so that coordination between primary activities is optimized. As a result, the overall process becomes more efficient.

Digital transformation has an indirect effect on supporting activities, as sustainable and sustainable structures must be created here so that the constantly changing economic conditions can be used profitably. In the end, digital transformation leads to a blurring of the distinction between primary and supporting processes, so that An internal value network is being created. Value creation is therefore no longer traditionally created in a linear value creation process that is time-shifted and sequential, but flexible, networked and coordinated.

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‍Sounds complicated? Is it also — but broadly speaking, the implementation of the vertical transformation can be divided into three sequential stages:

• First, the already established value creation model can simply be increased by increasing the efficiency, quality and reliability of processes through digital transformation while reducing costs.
• Second, the variability and flexibility of the production system can be increased through a comprehensive digital transformation of production and the three aspects underlying it — production processes, the devices and machines used, and the product itself. As a result, it is possible to react significantly faster and more efficiently to external factors, such as changing customer requirements (e.g. more individual products) or market needs (e.g. striving for transparency).
• Ultimately, thanks to digital transformation and the associated evaluation of data, optimal networking can be used to offer new services and thus open up new business models.

But what does that look like in practice?

Using the example: The topic of “smart farming” is hotly debated and should help to sustainably restructure agriculture and make it more ecological. This both increases the established value creation model and increases the variability and flexibility of the production system. The data required for this purpose is increasingly enriched by the digitalization of the company (use of digitized machines, robotics) and the use of sensors and control technology, combined and supplemented with the help of weather forecasts or market information, for example, so that all work steps are interlinked and optimal decision support takes place. The resulting amounts of data (“big data”) must be analyzed using digital technologies such as AI in order to make decision support possible. With the help of data on soil condition, availability of agricultural resources, climate data and much more, it is even possible to calculate the best crop rotation or the best animal crew. It is therefore not just about improving individual agricultural production processes, but also about optimising the operational processes and decisions of a farm.

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However, in order to achieve the optimal interplay of data, the farm must be connected horizontally with the entire value chain. Find out exactly what that means in the next section. 😊

The horizontal value chain

Horizontal integration goes one step further by also integrating external partners into the value chain; this results in a Networking across company borders with the aim of enabling and optimising the exchange of data between the actors involved in the value creation process.

The integration of IT systems along the entire value chain is a key element of horizontal integration, which results in material, information and financial flows along the value chain. This cross-company integration not only leads to Emergence of new forms of value chain organizations, but also of new intercompany relationships — the individual value chains are no longer isolated from one another. Instead, in the future, value creation will take place through closely interconnected actors who communicate in real time, resulting in a dynamic division of labor along the entire value chain. This has the following advantages, e.g.:

• increased transparency along the entire value chain
• an optimized coordination of supply and demand, as data flows between manufacturing and trading companies in real time
• a logistics chain that can be constantly improved using sensors to measure the length of site visits, general condition, etc.
• shortening production times and speeding up innovation cycles
• a pooling of cross-company resources so that obstacles can be overcome more easily
• an increased exchange of information and resources between actors, which leads to the collective creation of results, particularly with regard to the value proposition vis-à-vis customers

It all sounds good and good, but What does that look like in reality?

Using the example: After a good has been produced using “smart farming”, the next step is to transport it to the processing industry (e.g. dairy) using optimised collection routes. In production, automated, self-cleaning product lines are used, which are equipped with sensor-based product documentation. This also involves automatic planning and management of the production and logistics network, which is based on current inventories and capacities in the sales chain and is based on sales forecasts. Packaging is carried out using automated packaging management, which uses real-time data about the product and customer requirements. The fully packaged product is then shipped to a regional warehouse, which is close to the customer. Delivery to the point of sale is supported by dynamic route optimization and is carried out using real-time product tracking, so that the customer ultimately has comprehensive quality tracking from field to plate.

Based on this example, it becomes clear that a horizontally integrated value chain makes the increasing striving for transparency and sustainability in agriculture possible and customers can therefore be sure that they are buying sustainable and regional food. Even today, you can scan QR codes on food and track the development of the product.

But there are actually some risks hidden!

• As a result of increasing horizontal networking, new players are entering traditional value chains, which fill knowledge gaps, particularly in the areas of manufacturing IT equipment, IT and analysis services, and the development of software products. As these skills are becoming more and more important, there is a dependency relationship, as traditional companies barely build up their own resources and competencies.
• In addition, horizontal networking can result in other players gaining access to sensitive customer data or internal company data — data protection is of fundamental importance here. On the other hand, it is only the flow of data that leads to processes being optimized, which makes the whole thing tricky.
• There is an increase in interfaces with other companies and thus also an increase in the complexity of interactions, which can be overwhelming, especially for smaller companies.
• The heterogeneous implementation of digital transformation along the value chain can also mean that only individual players in a value chain are ready for horizontal integration. As a result, there is no optimization.
• Another risk is that companies, for example, implement IT systems that are not compatible with each other.
• In the end, the largest proportion of companies are small and medium-sized enterprises (SMEs). In Germany, for example, these account for almost 98%. SMEs are usually limited in their actions due to a lack of financial resources, which slows down the process of digital transformation, as it is not possible to regularly invest in new digital technologies.

Overall, it can be said that we still have a lot of plans!

Looking to the future, it can be said that in the long term people will no longer be talking about value chains but networks - but many companies are faced with a need for intensive action before that happens. The “SME Digitalization Index 2020/2021" found that the level of digitization has risen across all industries and company sizes. Medium-sized companies now score 56/100 points. Nonetheless, only every second company sees digitization as a strategic project to date. And “surprisingly”, large companies have a digital advantage — but SMEs are slowly catching up!

We see these changes up close and personal every day while working at 55BirchStreet. It is inspiring and impressive what measures small and large companies that we can support are already implementing and how the vision of companies is adapting to the fast-moving world. We are delighted to be part of this long, demanding, but also exciting journey

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