Defense Industry Needs New Way of Doing Business.

• Author: Dunn, Richard L.
• Position: Commentary

A senior procurement executive of one of the military services suggested that the defense industry might have to be nationalized if certain trends continue.

Based on subsequent comments, it is not clear whether the original statement was meant to be taken seriously or not. In any event, the organization of the defense industry is a subject that should be seriously considered.

There are only a few organizational options for any industry. Prime among these are: nationalized; commercially oriented driven by market forces; or a regulated public utility. Which of these organizational constructs best describes the state of the defense industry today? This will be discussed. However, first it makes sense to describe huge changes that have occurred.

Before World War II, the defense industry was relatively small. The government had its own arsenals and shipyards dedicated to developing and producing weapons. Industrial firms also supplied many of the military's needs, but few of them relied solely or primarily on the military as their principal market. This was an era when commercial airlines had navigation equipment far superior to anything developed by the Army Air Corps, for example. During World War II, major industrial firms were mobilized to supply the weapons needed by the military.

After the war most of the companies that had been converted to defense production returned to their former lines of business. As the post-war period chilled into a Cold War, a specialized defense industry began to emerge. It supplied the high-tech weaponry and supporting gear that was then unique to the military such as jet engines, nuclear materials, sophisticated electronics, advanced materials and radars. Over the years, numerous laws and regulations began to differentiate the defense industry from firms that addressed commercial markets.

Today, few areas of high technology are unique to the military. The commercial sector invests in research and development and introduces or upgrades innovative products rapidly. A comparison of Defense Department R&D contract awards shows that top firms receiving these contracts are not leaders in any industry segment except defense and aerospace. Moreover, leaders in high-tech industry sectors other than defense and aerospace receive little, if any, such funding.

They do, however, make major investments in R&D. This is only one data point among many that illustrates that the defense industry is segregated from the broader...