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

I

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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firm behavior in turn can alter the structure of an industry and the contours of competition.
Existing theoretical models, however, tend to assume relatively simple linear relationships without feedback.Indeed,manystrategic theories attempt to classify firms and industries and to describe appropriate strategiesfor each class; examplesinclude the Boston ConsultingGroup matrix for resource allocation and Bartlett's of classification international strategies(Bartlett and Ghoshal,1989).Although thesemodelsare basedon recurrent patternsthat we recognizein the real world, there are usually far too many for exceptions the modelsto havemuchpredictive value. Chaostheory, which is the study of nonlinear dynamic systems, promises to be a useful conceptualframework that reconcilesthe essenwith the emerof tial unpredictability industries genceof distinctivepatterns(Cartwright,
1991).
Although chaostheory was originally developed
Radzicki
in the contextof the physicalsciences,
(1990) and Butler (1990) amongstothers have

168

D. Levy

noted that social, ecological, and economic have confoundedmathematicians years. A for systems tend to be characterized nonlinear similar problem afflicts someonewho is trying also by relationships complex and interactions evolve to calculate the path of an object in the that dynamically over time. This recognitionhas led gravitational pull of two or more bodies.While to a surgeof interestin applyingchaostheory to we canusesimpleNewtonian equations predict to a numberof fields,includingecology(Kauffman, the orbits of planetsaroundthe sun with a high l99l), medicine(Goldberger,Rigney and West, degreeof accuracy, mathematics the involvedin
1990) internationalrelations (Mayer-Kressand the case two or more 'suns'become of intractable.
Grossman,1989),and economics
(Baumol and The problem