Chaos Theory And Strategy Theory

Strategic Management Journal, Vol. 15, 167-178(1994)

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THEORY, CHAOSTHEORY AND STRATEGY: APPLICATION. AND MANAGERIAL IMPLICATIONS

DAVIDLEVY

Department of Management, lJniversity of Massachusetfs- Boston Boston, Massachusetts, U.S.A.

This paper argues that chaos theory provides a useful theorectical framework for understanding the dynamic evolution of industries and the complex interactions among industry actors. It is argued that industries can be conceptualized and modeled as complex, dynamic systems, which exhibit both unpredictability and underlying order. The relevance of chaos theory for strategy is discussed, and a number of managerial implications are suggested. To illustrate the application of chaos theory, a simulation model is presented that depicts the interactions between a manufacturer of computers, its suppliers, and its market. The resuhs of the simulation demonstrate how managers might underestimate the costs of international production. The paper concludes that, by understanding industries as complex systems, managers con improve decision making and search for innovative solutions.

INTRODUCTION One of the enduring problems facing the field of strategicmanagmentis the lack of theoretical tools available to describe and predict the behaviorof firms and industries.For example, even if we know that oligopolisticindustriesare periodsof stabilityalternating likely to experience with periods of intense competition, we do not know when they will occur or what will be the outcome. Similarly, it is almost impossibleto predict the impact of the advent of a new competitor or technology in an industry. The problem is that industries evolvein fundamental a dynamicway over time as a result of complex interactionsamong firms, government, labor, consumers, financial institutions, and other elementsof the environment. Not only does industry structure influence firm behavior, but

Key words: Chaostheory, simulation,international, supply chain

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