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Chaos Theory And Strategy: Theory Application And Managerial Implications

David Levy presented his idea about Complexity management , chaos theory and how this theory could be applied and help managers

Chaos Theory And Strategy: Theory Application And Managerial Implications

  1. 1. David Levy
  2. 2. Muhammad Taimur Shams Uddin Nighat Saif Safia Zeb Mustafa Kakakhel
  3. 3.  To provide theoretical framework for dynamic evolution of industries  To provide application of Chaos theory in strategic management  To provide implication of Chaos theory for managerial purposes
  4. 4.  Strategic management lacks theoretical tools to predict the behavior of firms and industries.  Industries evolve dynamically overtime due to actors’ interactions.  Existing theories assume simple linear relationships without feedback.  Chaos theory provides useful conceptual framework accommodating the non linear complexity.
  5. 5.  Chaos theory is the study of complex, non linear dynamic systems.  Butterfly effect  E.g. pendulum suspended between magnets  Tiny variations in initial position magnifies and results in chaotic behavior.  Predictability short term vs. long term
  6. 6.  Industries are assumed to be dynamic, complex and non linear systems.  Interdependency of firms and industrial actors  Industries are non linear and are path dependant  So industries behave as chaotic systems
  7. 7. 1. Long term planning is very difficult  Smaller disturbances in initial state multiplies over time  Future forecasting is difficult due to complexity and non linear relationships.  Business should not spent on forecasting and strategic planning
  8. 8. 2. Industries do no reach stable equilibrium  Traditional theories tries to reach stable equilibrium while equilibrium is not possible in chaotic system  Industries do not settle down and stability is not long lasting  E.g. Prices and investment patterns are short lived
  9. 9. 3. Dramatic change can occur unexpectedly  Traditional theories suggest that small changes in parameters bring small changes in equilibrium  Dramatic fluctuations occur internally in chaotic systems.  Characteristic of probability distribution in chaotic systems.  Small exogenous changes may also bring magnified fluctuations.  E.g. New entrants or small change in technology
  10. 10. 4. Short term forecasts are possible  Long term forecasting is difficult while short term forecasting is possible  This is because of the presence of patterns and fractals  The accurate models of complex system with carefully drawn initial points help in short term prediction  Chaotic systems shows repetitive patterns helping in forecasting
  11. 11.  General guidelines are required since fixed strategies cannot be formulated for every scenario  Firms change their strategies as industrial structures evolve  Best strategies are those which achieve their goals even indirectly.  So we need dynamic strategies for coping with complexity and uncertainty
  12. 12.  A model based on California Computer Technology is presented  This model demonstrates how chaotic theory can help in understanding real managerial issues  Supply chain as complex, dynamic and non linear system.
  13. 13.  Two important dimensions  1. Uncertainty  Each stage is exposed to shocks  Finished products fluctuate in volume to this uncertainty  The inventory need to be adjusted to cope with this uncertainty
  14. 14.  2. Time Relationship  Disruption in one stage causes changes in other parts of the system  These disruption propagate forward and backward along the chain  This disruption causes chaos within the supply chain
  15. 15.  Managers should make accurate sale forecasts to reduce cost of offshore manufacturing  Managers should deal with external factors like suppliers  Managers should reduce the occurrence of internal production problems  Managers should change the structure of supply chain accordingly
  16. 16.  Chaos theory provides conceptual framework for the dynamic evolution of industries  Long term forecasting is almost impossible for chaotic systems  However short term forecasting is possible  Dramatic changes can occur unexpectedly
  17. 17.  Chaos theory highlights the importance of guidelines formulation for coping with complexity  Underestimating complexity may result in unanticipated costs  Management might reduce the volatility of supply chain and improve its performance
  18. 18. Thank You

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