Military transformation requires new suppliers: Pentagon study says more innovative companies needed in defense sector.

• Author: Erwin, Sandra I.

The Pentagon's latest study on the defense industrial base confirms what has become increasingly obvious to experts and observers: the Defense Department and its top contractors are hindering the entrance of new firms into the marketplace.

Sizeable increases to the defense budget alone are not enough to widen business opportunities for non-defense contractors, which often have a hard time breaking into a market where a handful of big players rule.

The defense industry as it exists today--dominated by a cluster of giant conglomerates--may not be nimble enough to adapt to new requirements for future weapon systems, experts noted.

An important question for the Defense Department is, "Can the industry support transformation?" said Kent Kresa, chief executive officer of Northrop Grumman Corp.

Kresa, who runs the nation's third-largest military contractor, said that the Defense Department should revamp antiquated regulations and ensure intellectual property is protected, in order to attract non-traditional suppliers into the defense sector.

Companies such as General Motors, Texas Instruments and IBM have exited the defense industry, "even though the government has tried to make defense work more attractive to non-defense companies," Kresa said in a speech to the American Institute of Aeronautics and Astronautics.

The reluctance of many businesses to get involved in the defense industry is "not encouraging," Kresa said. "Today, smaller firms are hesitant to deal with the government. Most are not equipped to navigate the demands of federal acquisition regulation. Many firms fear the loss of their intellectual property or other restrictions on their use."

A study due out this month--sponsored by the office of the deputy undersecretary of defense for industrial affairs--says that the current makeup of the industry is adequate to meet near-term national defense requirements, but also alerts to potential shortfalls in the industry's ability to meet the needs of the future.

Military priorities, such as chemical-biological defense, cyber-warfare and the growing demand for high-speed communications are unlikely to be satisfied entirely by large defense firms, said the study, which Kresa cited in his remarks.

According to the study, smaller firms historically have contributed the most to defense innovation. Approximately 35 percent of future technologies are likely to come from non-traditional suppliers. Foreign firms are expected to supply about 18...