Context Diagram In A Nutshell

A context diagram is a model illustrating the interaction between a product and external people, organizations, or systems. The context diagram is used by business analysts to understand the context and boundaries of the systems within a project. The structural elements of a context diagram comprise the product, external entities, and data flows.

Understanding a context diagram

The context diagram identifies the flow of information between the system and external entities (actors) and helps the project team identify the interfaces that it needs to account for.

Businesses will find context diagrams to be useful when:

  • Work has begun on a new product that is expected to interact or impact existing systems.
  • An existing process is being automated, involving the building of a new system or the implementation of a commercial off-the-shelf (COTS) system.
  • An existing system needs to be replaced – which interfaces will be impacted by the upgrade?
  • Revisions need to be made to a system such that interfaces need to be added or removed.

The context diagram usually forms part of a requirements document and must be read and understood by all key project stakeholders. As a result, it should incorporate plain language wherever possible.

The structural elements of a context diagram

To illustrate key interactions, the diagram incorporates three symbols according to the elements they represent. These elements include:

The product (circle)

Or any system, process, or business entity responsible for processing and sending information to each entity.

Importantly, the product in question must be within the control of the initiative to change.

Systems, processes, people, or organizations that cannot be changed by the initiative should be represented as external entities.

External entities (rectangles)

Defined as the people, organizations, and systems that provide data to (or consume data from) the product.

In a hotel reservation system (product), external entities include hotel guests, financial institutions, and external reservation systems.

Data flow (directional arrows)

How does the product interact with external entities via data transfer? This encompasses user interfaces, file transfers, reporting, and APIs among other things.

Each data flow is represented by an arrow annotated with text detailing the type of data that flows between the product and each entity.

The label itself should be a noun giving a very general description of the data flow.

For example, data flow between a bank and a hotel reservation system may include labels such as “payment validation request” and “payment validation”.

Benefits of context diagrams

Project teams that are unfamiliar with context diagrams should know that they can realize several benefits:

Error identification

Context diagrams provide a means for noting omissions or errors in a business plan or project.

This helps the business mitigate risks and reduce costs before project implementation.

Scope definition

In some cases, the scope of a project may be hard to communicate to every stakeholder.

The context diagram clearly illustrates the scope of a project in a way that is relatable and understandable.

Customer clarification

The project team can use the diagram to provide clarity on the user group that it considers to be its customers.

This gives the organization impetus and purpose and allows project sponsors to make targeted investment decisions.

Context diagram example

We will now outline some additional applications of context diagrams as well as expand on the hotel reservation system example touched on earlier.

In each case, we’ll list the product, external entities, data flow, and data flow description where relevant.

Automated teller machine

A context diagram can be used to depict ATM software and illustrate how it interacts with hardware. 

The ATM system (product) interacts with the following external entities:

  • Accounts database (external entity) – account information (data flow descriptor).
  • Cash dispenser – cash details and warnings.
  • Printout dispenser – printout information and warnings.
  • Customer display – display information.
  • Card reader – data and commands.
  • Customer keypad – data and commands.
  • Control system – data and commands.

Online community

Work context diagrams can also be used to clarify the factors and events that must be analyzed to ensure a product supports its environment.

In this example, consider the “give-and-take” interactions that occur between an online community (product) and its key stakeholders:

  • Staff writers (external entity) – content out, compensation in (data flow descriptors).
  • Community users – registration out, tools, and information in.
  • Advertisers – payments out, advertising spots in.
  • Accountants – financial reports out, financial data in.

Supply chain management

Business context diagrams are another iteration that defines task expectations that are either within or outside of a company’s scope.

These diagrams also serve as a systems requirements document since project stakeholders can rigorously assess the resources required for successful implementation.

Let’s now consider a context diagram that illustrates the data flow that occurs between a supply chain management system and the sales channels it serves.

Like any robust context diagram, this one identifies the tasks involved in each interaction and in the process, clearly defines the range and limitations of the system:

  • Supply chain management system (product).
  • Wholesale distributors (external entities) – inventory levels and orders out, delivery details in.
  • Retail distributors – orders out, delivery information in.
  • Suppliers – delivery information and shipment details out, purchase orders in.

Hotel reservation system

In this fourth example, let’s return to the example of the hotel reservation system:

  • Book room (product).
  • Hotel rooms (external entity) – room (data flow descriptor).
  • Time/schedule – current time and date. 
  • Financial institution – payment validation request in, payment validation out.
  • Guest – booking request out, booking confirmation in.
  • External reservation system – booking request in, booking confirmation out.
  • Bookings – booking.
  • Guests – guest.

Order processing system

In the fifth and final example we have a context diagram for an order processing system:

  • Order processing system (product).
  • Inventory (external entity) – available inventory in, product availability request out (data flow descriptors).
  • Production – production schedule in, confirmed order out.
  • Customer – request payment, order status in, status response, invoice out.
  • Delivery company – delivery service, goods in, product delivery information out.
  • Procurement – requisition request out.
  • Supplier companymarketing services, orders in.
  • Government – tax rate, import/export registration in.
  • Credit agency – credit validation in, credit demand out.

Key takeaways

  • A context diagram graphically represents the flow of information between a product and its people, systems, or organizations.
  • A context diagram contains a product, process, system, or business entity at its center. The product is connected to external entities by directional arrows which describe the nature of data flow between the product and each entity.
  • A context diagram must be created in such a way that all project stakeholders can understand the conceptual relationships between key elements. Primarily this is achieved by assigning very general, noun-based descriptions to the data flow.

Connected Analysis Frameworks

Failure Mode And Effects Analysis

A failure mode and effects analysis (FMEA) is a structured approach to identifying design failures in a product or process. Developed in the 1950s, the failure mode and effects analysis is one the earliest methodologies of its kind. It enables organizations to anticipate a range of potential failures during the design stage.

Agile Business Analysis

Agile Business Analysis (AgileBA) is certification in the form of guidance and training for business analysts seeking to work in agile environments. To support this shift, AgileBA also helps the business analyst relate Agile projects to a wider organizational mission or strategy. To ensure that analysts have the necessary skills and expertise, AgileBA certification was developed.

Business Valuation

Business valuations involve a formal analysis of the key operational aspects of a business. A business valuation is an analysis used to determine the economic value of a business or company unit. It’s important to note that valuations are one part science and one part art. Analysts use professional judgment to consider the financial performance of a business with respect to local, national, or global economic conditions. They will also consider the total value of assets and liabilities, in addition to patented or proprietary technology.

Paired Comparison Analysis

A paired comparison analysis is used to rate or rank options where evaluation criteria are subjective by nature. The analysis is particularly useful when there is a lack of clear priorities or objective data to base decisions on. A paired comparison analysis evaluates a range of options by comparing them against each other.

Monte Carlo Analysis

The Monte Carlo analysis is a quantitative risk management technique. The Monte Carlo analysis was developed by nuclear scientist Stanislaw Ulam in 1940 as work progressed on the atom bomb. The analysis first considers the impact of certain risks on project management such as time or budgetary constraints. Then, a computerized mathematical output gives businesses a range of possible outcomes and their probability of occurrence.

Cost-Benefit Analysis

A cost-benefit analysis is a process a business can use to analyze decisions according to the costs associated with making that decision. For a cost analysis to be effective it’s important to articulate the project in the simplest terms possible, identify the costs, determine the benefits of project implementation, assess the alternatives.

CATWOE Analysis

The CATWOE analysis is a problem-solving strategy that asks businesses to look at an issue from six different perspectives. The CATWOE analysis is an in-depth and holistic approach to problem-solving because it enables businesses to consider all perspectives. This often forces management out of habitual ways of thinking that would otherwise hinder growth and profitability. Most importantly, the CATWOE analysis allows businesses to combine multiple perspectives into a single, unifying solution.

VTDF Framework

It’s possible to identify the key players that overlap with a company’s business model with a competitor analysis. This overlapping can be analyzed in terms of key customers, technologies, distribution, and financial models. When all those elements are analyzed, it is possible to map all the facets of competition for a tech business model to understand better where a business stands in the marketplace and its possible future developments.

Pareto Analysis

The Pareto Analysis is a statistical analysis used in business decision making that identifies a certain number of input factors that have the greatest impact on income. It is based on the similarly named Pareto Principle, which states that 80% of the effect of something can be attributed to just 20% of the drivers.

Comparable Analysis

A comparable company analysis is a process that enables the identification of similar organizations to be used as a comparison to understand the business and financial performance of the target company. To find comparables you can look at two key profiles: the business and financial profile. From the comparable company analysis it is possible to understand the competitive landscape of the target organization.

SWOT Analysis

A SWOT Analysis is a framework used for evaluating the business’s Strengths, Weaknesses, Opportunities, and Threats. It can aid in identifying the problematic areas of your business so that you can maximize your opportunities. It will also alert you to the challenges your organization might face in the future.

PESTEL Analysis

The PESTEL analysis is a framework that can help marketers assess whether macro-economic factors are affecting an organization. This is a critical step that helps organizations identify potential threats and weaknesses that can be used in other frameworks such as SWOT or to gain a broader and better understanding of the overall marketing environment.

Business Analysis

Business analysis is a research discipline that helps driving change within an organization by identifying the key elements and processes that drive value. Business analysis can also be used in Identifying new business opportunities or how to take advantage of existing business opportunities to grow your business in the marketplace.

Financial Structure

In corporate finance, the financial structure is how corporations finance their assets (usually either through debt or equity). For the sake of reverse engineering businesses, we want to look at three critical elements to determine the model used to sustain its assets: cost structure, profitability, and cash flow generation.

Financial Modeling

Financial modeling involves the analysis of accounting, finance, and business data to predict future financial performance. Financial modeling is often used in valuation, which consists of estimating the value in dollar terms of a company based on several parameters. Some of the most common financial models comprise discounted cash flows, the M&A model, and the CCA model.

Value Investing

Value investing is an investment philosophy that looks at companies’ fundamentals, to discover those companies whose intrinsic value is higher than what the market is currently pricing, in short value investing tries to evaluate a business by starting by its fundamentals.

Buffet Indicator

The Buffet Indicator is a measure of the total value of all publicly-traded stocks in a country divided by that country’s GDP. It’s a measure and ratio to evaluate whether a market is undervalued or overvalued. It’s one of Warren Buffet’s favorite measures as a warning that financial markets might be overvalued and riskier.

Financial Analysis

Financial accounting is a subdiscipline within accounting that helps organizations provide reporting related to three critical areas of a business: its assets and liabilities (balance sheet), its revenues and expenses (income statement), and its cash flows (cash flow statement). Together those areas can be used for internal and external purposes.

Post-Mortem Analysis

Post-mortem analyses review projects from start to finish to determine process improvements and ensure that inefficiencies are not repeated in the future. In the Project Management Book of Knowledge (PMBOK), this process is referred to as “lessons learned”.

Retrospective Analysis

Retrospective analyses are held after a project to determine what worked well and what did not. They are also conducted at the end of an iteration in Agile project management. Agile practitioners call these meetings retrospectives or retros. They are an effective way to check the pulse of a project team, reflect on the work performed to date, and reach a consensus on how to tackle the next sprint cycle.

Root Cause Analysis

In essence, a root cause analysis involves the identification of problem root causes to devise the most effective solutions. Note that the root cause is an underlying factor that sets the problem in motion or causes a particular situation such as non-conformance.

Blindspot Analysis


Break-even Analysis

A break-even analysis is commonly used to determine the point at which a new product or service will become profitable. The analysis is a financial calculation that tells the business how many products it must sell to cover its production costs.  A break-even analysis is a small business accounting process that tells the business what it needs to do to break even or recoup its initial investment. 

Decision Analysis

Stanford University Professor Ronald A. Howard first defined decision analysis as a profession in 1964. Over the ensuing decades, Howard has supervised many doctoral theses on the subject across topics including nuclear waste disposal, investment planning, hurricane seeding, and research strategy. Decision analysis (DA) is a systematic, visual, and quantitative decision-making approach where all aspects of a decision are evaluated before making an optimal choice.

DESTEP Analysis

A DESTEP analysis is a framework used by businesses to understand their external environment and the issues which may impact them. The DESTEP analysis is an extension of the popular PEST analysis created by Harvard Business School professor Francis J. Aguilar. The DESTEP analysis groups external factors into six categories: demographic, economic, socio-cultural, technological, ecological, and political.

STEEP Analysis

The STEEP analysis is a tool used to map the external factors that impact an organization. STEEP stands for the five key areas on which the analysis focuses: socio-cultural, technological, economic, environmental/ecological, and political. Usually, the STEEP analysis is complementary or alternative to other methods such as SWOT or PESTEL analyses.

STEEPLE Analysis

The STEEPLE analysis is a variation of the STEEP analysis. Where the step analysis comprises socio-cultural, technological, economic, environmental/ecological, and political factors as the base of the analysis. The STEEPLE analysis adds other two factors such as Legal and Ethical.

Activity-Based Management

Activity-based management (ABM) is a framework for determining the profitability of every aspect of a business. The end goal is to maximize organizational strengths while minimizing or eliminating weaknesses. Activity-based management can be described in the following steps: identification and analysis, evaluation and identification of areas of improvement.

PMESII-PT Analysis

PMESII-PT is a tool that helps users organize large amounts of operations information. PMESII-PT is an environmental scanning and monitoring technique, like the SWOT, PESTLE, and QUEST analysis. Developed by the United States Army, used as a way to execute a more complex strategy in foreign countries with a complex and uncertain context to map.

SPACE Analysis

The SPACE (Strategic Position and Action Evaluation) analysis was developed by strategy academics Alan Rowe, Richard Mason, Karl Dickel, Richard Mann, and Robert Mockler. The particular focus of this framework is strategy formation as it relates to the competitive position of an organization. The SPACE analysis is a technique used in strategic management and planning. 

Lotus Diagram

A lotus diagram is a creative tool for ideation and brainstorming. The diagram identifies the key concepts from a broad topic for simple analysis or prioritization.

Functional Decomposition

Functional decomposition is an analysis method where complex processes are examined by dividing them into their constituent parts. According to the Business Analysis Body of Knowledge (BABOK), functional decomposition “helps manage complexity and reduce uncertainty by breaking down processes, systems, functional areas, or deliverables into their simpler constituent parts and allowing each part to be analyzed independently.”

Multi-Criteria Analysis

The multi-criteria analysis provides a systematic approach for ranking adaptation options against multiple decision criteria. These criteria are weighted to reflect their importance relative to other criteria. A multi-criteria analysis (MCA) is a decision-making framework suited to solving problems with many alternative courses of action.

Stakeholder Analysis

A stakeholder analysis is a process where the participation, interest, and influence level of key project stakeholders is identified. A stakeholder analysis is used to leverage the support of key personnel and purposefully align project teams with wider organizational goals. The analysis can also be used to resolve potential sources of conflict before project commencement.

Strategic Analysis

Strategic analysis is a process to understand the organization’s environment and competitive landscape to formulate informed business decisions, to plan for the organizational structure and long-term direction. Strategic planning is also useful to experiment with business model design and assess the fit with the long-term vision of the business.

Related Strategy Concepts: Go-To-Market StrategyMarketing StrategyBusiness ModelsTech Business ModelsJobs-To-Be DoneDesign ThinkingLean Startup CanvasValue ChainValue Proposition CanvasBalanced ScorecardBusiness Model CanvasSWOT AnalysisGrowth HackingBundlingUnbundlingBootstrappingVenture CapitalPorter’s Five ForcesPorter’s Generic StrategiesPorter’s Five ForcesPESTEL AnalysisSWOTPorter’s Diamond ModelAnsoffTechnology Adoption CurveTOWSSOARBalanced ScorecardOKRAgile MethodologyValue PropositionVTDF FrameworkBCG MatrixGE McKinsey MatrixKotter’s 8-Step Change Model.

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