Systemic efficiency

The final analytical tool that requires a note in value chain research is systemic efficiency, which takes a step back and regards the entire value chain as a system that competes with other value chains for scarce resources, and affects the survival and success of individual parts of the value chain. In essence this means that point-specific efficiency, the ability of single companies to organize their production and processes in an optimal way, is no longer enough in the systems of global production. As companies search for competitive advantage, they are faced with the challenge that in order to survive and thrive, they must also take some level of interest in the actions of other links of the chain. The systemic efficiency element thus further develops the characteristic of value chains explained under governance structures. Ways of governing distribution of capabilities, tasks and capital are no longer just structures organically emerging in all value chains, but strategic tools companies use to control their competitive environment. This is increasingly so for large lead firms, producers and buyers alike, that are able to and responsible for actively affecting the futures of value chains they belong to. (Kaplinsky, 2000). Beyond the above where the performance of the entire chain is looked at from the perspective of single companies searching for competitive advantage, relevant issues of systemic efficiency also arise from much of the economic models introduced previously in this chapter. Costinot, Vogel & Wang (2013) found that systemic efficiency resulting from technological differences guides the distribution of value chain tasks on the global scale. In essence countries with higher technological capabilities, in the model captured by lower failure rates in production, tend to

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carry out tasks higher up the chain where the costs of failure are greater. The model also bears significance to systemic efficiency from another perspective, namely companies searching for technological development as a tool to upgrade value chains or parts of it. As Costinot, Vogel & Wang show, technological changes, whether global or local, have different kinds of effects on the ways countries move up and down the value chain, whether there is more or less concentration and how inequality among nations participating in a chain change.

Another note on the interplay of company actions and systemic efficiency is also in order here. Both Costinot, Vogel & Wang and Baldwin & Venables (2013) state that decisions arising from single company actions are often not efficient. Both studies draw attention to overshooting, reshoring and coordination failures, where company decisions may exhibit too much or too little offshoring at different times of the existence of the value chain. Particularly coordination failures where the value chains are too small to induce efficient unbundling, or single actors cannot count on the fact that other parts integral for their offshoring decisions move in sync, are exemplary problems of systemic efficiency. These theoretical considerations then caution against companies being able to act as governors for the entire chain as single company interest may result in inefficient solutions from the perspective of the entire system. A further consideration can be added from the works of Sutton (2007) and Neary et al. (2015). Sutton first showed that global competition produces a moving capability window, which results in a lower bound of quality under which no company can sell products. This also entailed that the trade-off between low costs and quality does not really exist; there are limits to what cost competitiveness can do if it is not combined with quality that exceeds the lower bound of global competition. Neary et al. also study whether productivity or quality is key in export performance. One of the issues they note is that due to flexible manufacturing, or unbundling, companies focus on production that is close to their core competence. This may lead to more complexity breaking the value chain into more stages, especially in the case of snake-type chains (Baldwin & Venables, 2013), and thus increases the potential for coordination problems and inefficiencies arising from single company decisions.

Some further characteristics of the above models and their effects were outlined in a previous chapter on geographic concentration but as the details are beyond the scope of this thesis, notes on the underlying theory will suffice here. In some of the value chain analysis literature systemic efficiency is treated within governance structures but as witnessed here, the inclusion of economic theory of production and trade adds further depth to understanding the global division of tasks and value, inequality issues as well as effects of technological change on the

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chain in its entirety. The above specific issues are also raised due to their relevance for the global and Namibian diamond value chains which exhibit a few powerful supply side lead companies focusing on core competence acting in a snake-type value chain facing calls of further vertical integration. The outlined quality window thinking is also highly relevant for the case study as the middle and the end of the chain exhibit multifaceted quality requirements that might prove very hard to obtain. These aspect are further discussed in chapter 4.