“Chaos breeds life when order breeds habit.”
A theory with multiple implications in the various existing fields of study, the Chaos Theory is non-linear and unpredictable. It is defined as ‘’The study of apparently random or unpredictable behaviour in systems governed by deterministic laws.’’ The butterfly effect draws from the simple analogy that a butterfly flapping its wings in can cause a typhoon. Existing complex systems display unpredictable behaviour. Minor changes in the initial conditions can profoundly alter system outcomes. Changes that mean nothing in the time can reap monumental rewards in the future due to unpredictable factors. It explains that a small insignificant change can have non-linear effects on a complex system.
“Understanding the butterfly effect can give us a new lens through which to view business, markets, and more.”
Edward Lorenz found that the smallest change in the primary/initial conditions created a different outcome in weather predictions and the same holds for businesses. This concept discovered by Lorenz has many inferences including impacts in economics and businesses. Marketplaces are essentially chaotic systems affected by the smallest of changes. A global pharmaceutical company introduced a sanitizer in the year 2016. At the time, it did not influence the company's revenues by a large margin. However, when the pandemic that no one saw coming struck, the sanitizer line took off and soon became responsible for 45% of the company’s profits. This unpredictability explains the volatility of businesses and makes it difficult to define the future. We time and again see small start ups blow up in the market and long standing companies fall to the ground. Minute changes in pre-existing technologies transform how humans lead their lives. Trends that are taking over today may disappear tomorrow.
The butterfly effect simply expresses that small changes can create a significant impact in the future, which are predominantly undepictable due to the innumerable variations within and beyond the system. Most global businesses have taken this into their stride, despite the unstability. They introduce a small change in their strategy with reference to production, technology, marketing and promotion and aim to see positive effects in their growth and market share.
The Indian economy was relatively stable in the year from 2010-2015. Small businesses were growing at a steady rate and the employment rate was seeing an upward trend. On 8th November, 2016, the Prime Minister of India announced Demonetisation. This sudden move had a negative impact on sectors, especially small businesses which mostly ran on cash transactions. Daily wage workers lost their jobs because cash was scarce. Certain businesses had to shut down while various others faced losses because of this unpredictable change that had a significant impact on the economy and its functioning.
For most businesses, small changes are the most effective way to create a metaphorical storm. Businesses include strategic minute changes in either their product, pricing or marketing strategy. If the change doesn’t take place, the impact is not very huge. However, if they are successful, then the rewards can even take the business to the next level. The initial conditions surrounding a business are of utmost importance and the success or failure of a company is largely dependent on the same.
The 2008 credit crisis can be attributed to growing confidence in financial projections and disregard for the myriad of tiny factors that in turn can bring massive results. The investors at Wall Street failed to realise that though the systems for prediction had seen unimaginable improvement, they were still not 100% accurate. They trusted the system so much they put all their money on it, overlooking the fact that there was room for error which caused the market to nearly collapse. Similarly, the creators of computer models designed to predict the future ignored the butterfly effect. They failed to realise that they could not predict and control every aspect of the market. The social situation was such that everyone was driven to invest their savings in the market which pushed the prices up to unsustainable events proving to be a catalyst to the crash. This was a defining downfall and brought the concept of the butterfly effect to a position of importance.
Butterfly Effect also sheds light on an important aspect of a business which is that the customer is the king. Treating customers appropriately does more to improve a business than any amount of advertising or marketing ever could. It's next to impossible to replace the relationship developed between an employee and a customer which amounts to brand loyalty. Consumer behaviour cannot be mechanised or predicted. Small changes can be made to induce a positive attitude but the complete mechanisation of consumer behaviour can prove to be a major drawback.
The pandemic had shocking effects on all aspects of human life. The economic repercussions were tremendous. The pandemic is often compared to the butterfly effect. A virus that began in a certain place quickly spread throughout the world through travel routes and supply chains. The non-linear nature of the pandemic makes it challenging to predict where, when and to what extent the effects will be felt. Economies adopted the butterfly effect in response by introducing minute changes to overcome its ghastly effects. China, one of the world's largest economies, used the butterfly effect to their benefit midst the pandemic. China prioritised their supply chain to ensure that the supply of the important products was resilient and there was security of essentials. While the world dealt with scarcity of essentials, China did not have to face such a problem because they introduced minute changes to ensure that their supply chain was not compromised.
It's no news that the growing trade tensions between the USA and China are a potential threat to global economic growth. This trade war has a negative impact on the economies of other countries which can be ascribed to the butterfly effect. In times of such volatility, investors find themselves in a fix simply because they can’t tell what the future holds. In such situations, investors use factor based stress testing to evaluate the probable effect of trade wars, political instability and unprecedented natural calamities.
Over the last 20 years, the world has made monumental progress and the global supply chains have increased in complexity and have grown deeper than just customer and brand relationships. Complex linkages can reveal potential effects spanning across businesses nationally and internationally. The large-scale and unpredictable consequences of small and big occurrences can be linked to the butterfly effect.
Small initial actions which magnify as they propagate across time and space is the essence of the butterfly effect. As adapted by the business world, the sensitivity of a system to initial conditions is of utmost importance. While it has both positive and negative impacts, businesses can take steps to mitigate the negative implications and introduce well thought out changes which will help them grow and establish themselves in the market.