On the defensive.

• Author: Weidenbaum, Murray
• Position: National Affairs - Company overview

STRICTLY SPEAKING, there is no specific defense industry in the U.S. Many companies in a variety of sectors serve the Pentagon as prime contractors on weapons systems and other types of military equipment or supply components or services to these firms. However, a majority of these organizations devote most of their resources to meeting nondefense needs in civilian markets. Very few of them truly are government-oriented enterprises. The leading examples are Lockheed Martin, Boeing, General Dynamics, Northrop Grumman, and Raytheon. In most other cases, only specific divisions of otherwise civilian-oriented companies identify primarily--or at least heavily--with military work. Examples are United Technologies and General Electric, the major U.S. suppliers of jet engines for large aircraft.

Prior to World War II, defense industries as such virtually were nonexistent. When the nation found itself at war, civilian businesses converted to producing the tools of war. When war ended, they quickly reconverted to producing traditional civilian products. Specialized defense industries grew out of the increasing gap between civilian and military technology as well as the growing specialization of the tools of war.

The current defense-oriented companies and divisions operate in a business environment fundamentally different than the commercial economy. Unlike civilian government agencies, the military customer often enjoys a monopsonistic (one buyer) position in dealing with contractors. Thus, the government's procurement actions determine the success or failure, and the growth or decline, of the firms providing military equipment. To complicate matters, the weapons acquisition process is characterized by a unique set of uncertainties that differentiate it from other economic activity. Some of those uncertainties arose from a constantly changing external environment in terms of technology, actions, and plans by other nations, as well as our own defense policies.

The major defense companies (including the militarily-oriented divisions of civilian-oriented firms) are unusual business organizations. They are very good at what they are set up to do--design and produce state-of-the-art weapons systems or assist companies that are engaged in that activity. However, to do so, they differ in fundamental ways from commercially-oriented companies in basic characteristics. Defense firms have relatively low capitalization, little, if any, commercial marketing ability, and limited experience in producing at high volume and low unit cost. However, they thrive in a high-technology environment. Then again, their administrative structures are geared to the unique control and reporting requirements of the government.

Much of their work requires making products that do not exist when contracts are awarded. The government lacks knowledge of relevant prices and the offering company lacks production experience for the specific products on which it is bidding. Moreover, the powers...