Advanced Strategic Thinking; How to Apply Chaos and Complexity Theories in Strategy?

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Advanced strategic thinking; how to apply chaos and complexity theories in strategy?

In order to answer this question, an explanation of the terms ‘strategy’, ‘chaos theory’ and ‘complexity theory’ is needed.

Strategy
One of the best definitions of strategy is provided in Ghemawat's book "Strategy and the Business Landscape" is a quote from Alfred D. Chandler, Jr: “Strategy can be defined as the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out those goals”. To complement this definition, Johnson and Scholes define it as follows: “Strategy is the direction and scope of an organization over the long term: which achieves advantage for the organization through its configuration of resources within a changing environment, to meet the needs of markets and to fulfill stakeholder expectations”.

The principal of strategy is very well described in Michael Porter’s Activity System. According to Porter, “strategy is the creation of a unique and valuable position, involving a different set of activities”. This means that strategy is about combining activities in order to create fit between an organization’s activities. Strategic fit creates competitive advantage and superior profitability. Also Porter states that an organization has to make choices in what business it is in and who its customers are: “the essence of strategy is choosing what not to do”.

Since strategy is always a combination of analytical thinking and intuition, there is no magic set of knowledge that can help managers to create the perfect strategy.

Chaos Theory
Chaos theory looks at how very simple things can generate very complex outcomes that could not be predicted by just looking at the parts by themselves. The theory attempts to explain the fact that complex and unpredictable results can and will occur in systems that are sensitive to their initial conditions. An example of this is known as the Butterfly Effect, described by meteorologist Lorenz. It states that, in theory, the flutter of a butterfly's wings in China could actually effect weather patterns in New York City, thousands of miles away. In other words, it is possible that something very small can produce unpredictable and sometimes drastic results by triggering a series of increasingly significant events.

Another example of the chaos theory is the patterns of birds flying together in the sky. One would think that birds are very intelligent to figure out how to fly in such a formation and that there would have to be a leader giving the instructions to fly like that. Research into swarms however, has shown that all that is needed for each bird to maintain the distance between itself and its neighbors and fly in the average direction of its neighbors.

Simple rules can generate complex behaviors that just seem to emerge out of nowhere.

Complexity theory
Complexity theory looks at how complex systems can generate simple outcomes, it is used to understand how an organization adapts to its environment. It treats organizations as a collection of strategies and structures.

An example of such a complex system is the human body: billions of cells all work together in such a way that the body works as a single unit. Our body works to keep us alive. We get hungry when we need food; we get thirsty when we need water. We can think and we have a distinct personality. Something happens when large numbers of individual units come together and interact intensely with each other. New levels of operating just emerge through what is called self-organization. By looking at a single human cell, you could not tell that it would be able to operate with other cells to form a human body.

As Rutger Spreij states in his lecture: “one of the insights of chaos and complexity theories is that complex behavior can be driven by relatively simple rules. Many of the...
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