Chaos theory and strategy: Theory, application, and managerial implications

Abstract

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 results of the simulation demonstrate how managers might underestimate the costs of international production. The paper concludes that, by understanding industries as complex systems, managers can improve decision making and search for innovative solutions.