Chaos theory

Chaos theory is study of complex, non linear dynamic system. This system is very
sensitive to its initial point; a small change in initial point can bring enormous
change in final point. interactions among changes give rise to complexity and make
the system unpredictable. Although these systems are unpredictable but there are
patterns within the system that can be used to reduce unpredictability. This paper
use supply chain cct . Small disruptions interactions bring high volatile
change in the overall system (chaotic behavior). That incurs high cost to CCT.
Mathematically :
Chaotic systems r calculated using differential equations and diff equations cant be
solved so v cant find final state of chaotic systm at time t. for this differential
equation is divided into discrete diff. equations ( small eqtns) which take state of
system at time t to predict t+1 state (short term). These equations produce
patterns which are helpful in reducing uncertainty but still the system is not
completely predictable.
Chaotic theory and social sciences:

Chaos theory originally presented in physical science, but its applied in many other
fields. In social science little discussion can be found.
Relevance of chaos theory to strategy
Firms interact with other firms and actors(customers, suppliers, financial
institutions) in strategic way. They keep in mind the anticipated response of other
actors while designing their strategies. Previously inter firm behavior was explained
in economics and business strategy using game theory; that tries to achieve
equilibrium. While industry evolves dynamically and are path dependant. If we
assume that firms operate in evolve in chaotic manner we can draw the following
. While designing our strategy.
Long term planning is difficult
Smaller disturbances multiply over time chaotic system and this system is much
sensitive to initial condition that makes forecasting difficult. Indeed in our models
we use finite measure and cannot incorporate these smaller changes. When
forecasting is done through these models managers know that future outcomes are
uncertain.
Current linear models suggests that a good model and accurate starting point will
result in accurate forecasting but chaos theory suggests that long-term accurate

forecasting is not possible, because it is not possible to design a completely

accurate model. So organizations should not spend money on forecasting and
strategic planning rather design strategies on basis of their anticipation of future.
Industries do not reach stable equilibrium.
Traditional approach about influence of industry on firms behavior is based on
game theory that emphasize on equilibrium. Firms interact with each other and
reach a stable equilibrium but in chaotic theory equilibrium is not possible because
chaotic system doesnt pass the same point or exactly repeat itself.
The implication is that industries do not settle down and any apparent stability
may be short lived (price stability, investment patterns).
It also suggests that changes in industry are endogenous factor for firms behavior.
(corporate decision to enter or exit mkt new technologies change structure of
industry that in turn influence firm behavior). Chaotic system self organize
themselves into more complex structures like .
Dramatic change can occur unexpectedly
Traditional approaches of strategy and economics are based on linear relationship
and comparative static analysis that assumes that small change in parameters will
bring smaller change in equilibrium. While chaotic system argues that other than
these small exogenous changes internal dynamic can change structure of the
system dramatically.
Implication of this characteristic in business will be that entrant of new competitor
in large industry or small development in technology can have enormous impact on
competition in industry. (dell mail order strategy)
Short term forecast and predictions of patterns can be made.
Although long term predictability is not possible in chaotic system yet there are
patterns and fractals in the system that can be used for short term forecasting and
planning (boom and recession yet cant find duration of each). A good starting point
can give useful forecast for several short periods. ( weather forecast for few days
and a month?). order in chaotic system is also due to bounded nature of systems
and feedback f ( prices fluctuate in certain limit because of gov control). We can
associate different phases of the system with other characteristics due to
patterns(business cycle with demand, int rates, tightness of labour mkt). another
implication is that patterns are ind of scale ( stock prices daily monthly or min to
min have same pttern) these patterns with in patterns are called fractals. If we
apply this to business we may see previous events recur on large scale. Same
pattern of behavior is expected when we examine competition among businesses.
Guidelines are needed to cope with uncertainty and complexity

Strategies are guide line that