In from the Cold: Prospects for
the Conversion of the Defense Industrial Base
Maryellen Kelley and Todd A. Watkins
28 April 1995, v. 268, pp. 525-32
Copyright 1995 by the American Association
for the Advancement of Science
During the Carter-Reagan buildup (1979
to 1987), the U.S. Department of Defense (DOD) became an increasingly important
customer for domestic manufacturers, particularly in durable goods industries.
By the end of 1993, however, reductions in orders for weapons already in
production and the elimination of entire programs reduced DOD's real (inflation-adjusted)
procurement budget by 58% from 1985 levels. In this transition to a
post-Cold War economy, policy discussions about the competitiveness of
U.S. manufacturing and the restructuring of the defense industrial base
At the peak of the recent defense buildup
in 1987, defense purchases were responsible for nearly 12% of the total
sales of durable goods manufactured in the United States. Much of the
concern about the economic consequences of a continued drawdown from these
high levels of defense spending stems from questions about the capabilities
(and willingness) of defense contractors to successfully function in the
commercial economy. The defense industrial base is widely believed to have
become isolated and disconnected from the commercial manufacturing base.
A host of studies and reports argue that defense contractors have little
experience with commercial customers and are unfit for the rigors of competitive
markets[3-8]. As a consequence, conversion of defense manufacturing facilities
to commercial uses is expected to be costly and have little chance for
success. Moreover, some go so far as to warn against further reductions
in defense spending on the assumption that if conversion is successful,
defense-specific technical capabilities in the manufacturing supplier base
will be irretrievably lost.
For the most part, previous research on
defense manufacturing has been limited to case studies of a few leading
companies and top-down analyses of government contracting practices, particularly
as they affect corporate accounting and purchasing procedures. No analysis
of a large sample of defense manufacturers has been conducted. The last
systematic comparison of the practices of defense contractors and their
counterparts operating strictly in commercial markets was conducted by
Peck and Scherer 30 years ago. At the end of the Cold War, widely held
suppositions about the singularity of defense production and its isolation
from commercial practices have not been subject to rigorous empirical tests.
With data from our 1991 survey of U.S. manufacturing plants from 21 durable
goods industries, we demonstrate that structural and behavioral barriers
thought to divide defense contracting from commercial manufacturing are
actually quite rare. The defense industrial base is far-reaching and substantially
"dual-use"; that is, meeting commercial customers' requirements and military
specifications in the same facilities - indeed, using the same equipment
and work force.
The Conventional Wisdom: Defense Manufacturing
as an Isolated and Distorted System
Since President Eisenhower first employed
the term in 1961, the "military-industrial complex" has conjured up an
image of defense manufacturing as taking place in a specialized set of
firms separated from the rest of the economy. Melman, one of the most widely
cited critics of Pentagon spending during the 1970s, characterized the
manufacturing of defense products as a "permanent war economy" where "whole
industries and regions that specialize in military economy are placed in
a parasitic economic relationship to the civilian economy". Although
there has been considerable academic debate over the question of whether
defense expenditures have had a positive or negative impact on economic
growth, there has been remarkably little discussion focused on the issue
of how specialized and isolated defense manufacturing is from the rest
of industry. At the end of the Cold War, even the most knowledgeable defense
analysts assert that there is little overtap between defense and commercial
manufacturing activities. Instead, much of the current concern focuses
on procurement reform and the identification of those government contracting
regulations or military technical requirements that are believed to be
responsible for the divide that is assumed to separate the two industrial
spheres. According to Alic et al., for example, special technology requirements,
unique products, and intrusive government oversight have led firms to "conduct
military business in divisions that are managed separately from commercial
operations, often with separate work forces, production and research facilities,
accounting practices, engineering design philosophies, and corporate culture".
Although their explanations differ from those of Alic et al., Markusen
and Yudken also believe that there is an unbridgeable divide between commercial
and military manufacturing, which they describe as "a wall of separation
- a business culture on the military side that is ill-suited to engage
in commercial production, and vice versa".
The practice of isolating defense operations
is not assumed to be limited to the large multidivisional corporations
that are the recipients of major prime contract awards. Without reference
to any empirical evidence, Markusen and Yudken claim that "subcontractors
have become more, rather than less, specialized in military projects, as
the `wall of separation' reaches down into their ranks". Similarly,
former Deputy Assistant Secretary of Defense Gansler speculates that the
high costs of weapons systems can be at least partly attributable to the
dedication of lower tier suppliers to serving defense needs to the exclusion
of commercial customers. At the end of the Cold War, he believes that "only
a few suppliers remain in the lower tiers of the defense industry and they
are highly specialized. The specialization of these firms in defense subcontracting
means that DOD loses the economies of scale that could be realized in combining
defense and non-defense production in the lower tiers of the industry".
In sum, most of the dollars spent by DOD on its weapons systems are commonly
assumed to go to plants in which the entire organization - its technology,
workers, and management systems - is dedicated exclusively to serving that
Government contracting practices are believed
to be largely responsible for the differences separating the defense and
commercial industrial spheres. Certainly, the contracting relationship
between the government as "buyer" and defense contractors as "sellers"
of weapon systems departs in significant ways from the conditions associated
with a market system of exchange[9,10]. The stylized market system of exchange
presumed to operate for commercial transactions is characterized by many
buyers and sellers. Key features of this system simply do not apply to
government purchases of military weapons manufactured by private companies.
Rather than many buyers and sellers, there is only one buyer (the government)
for military weapons. The buyer also has the political power to restrict
the sale or use of products to other potential customers. A company that
makes a new high-tech weapon for DOD cannot sell that weapon to another
customer (such as another government) without DOD's permission. DOD even
forbids commercial use or sale of some of the components of these systems.
For a substantial share of contracts for
weapons systems, the government makes payments to defense contractors on
the basis of costs rather than on competitively set market prices. The
main reason for cost-based contracts is the uniqueness of the products
that defense contractors make. Moreover, the government (as buyer) exercises
considerable control over sellers' internal operations through its direct
involvement in the development of new weapons systems and its auditing
of suppliers' costs. These peculiarities of the defense contracting relation
have led some analysts to conclude that there must be little potential
for overlap between a production system that satisfies military needs and
one designed for commercial transactions, causing companies to "spin away"
their defense operations from their commercial activities. Instead
of being organized to satisfy the diverse demands of many customers, defense
contractors are believed to be "captive" suppliers to the government, oriented
solely toward compliance with its regulations.
The burden of regulatory compliance is
also thought to induce behavioral distortions. Special accounting rules
and unique or esoteric technical requirements are blamed for a wall of
separation dividing production for the military from commercial manufacturing.
This division between commercial and defense activities is thought to extend
from headquarters to the shop floor, serving to insulate a defense contractor's
commercial activities from the rules affecting its defense operations.
In the presumably rare instances when companies make commercial products
alongside their military products, cost-based pricing rules are expected
to provide perverse incentives with respect to subcontracting and investment
decisions. As a result, defense contractors are thought to subcontract
out less, employing more direct labor than do enterprises that make products
only for commercial customers[9,12]. Moreover, because there is assumed
to be little or no competitive pressure to reduce costs, defense contractors
are also thought to underinvest in productivity-enhancing technologies.
Although there may be any number of other
differences in the management styles and routines that distinguish companies
with close ties to the Pentagon from other enterprises, our focus is on
the underlying market structure and behaviors that are so frequently assumed
to separate defense production from the commercial industrial world. Our
study is the first to make systematic comparisons of commercial enterprises
with defense contractors from the same set of industries and the same production
processes for the period after the Carter-Reagan buildup. With data from
our 1991 survey, we investigated four propositions concerning structural
and behavioral characteristics thought to distinguish defense contractors:
1) Defense contractors tend to operate
facilities that are largely dedicated to military contract work.
2) Compared with commercial enterprises,
defense contractors and their managers and workers face less competition
and are more highly dependent on a few customers (DOD and a few large prime
3) Defense contractors do less subcontracting
of production operations than do commercial enterprises.
4) Defense contractors tend to invest far
less than commercial enterprises in productivity-enhancing technologies
that are relevant to nonmilitary production.
Our analysis of the differences separating
defense from commercial manufacturing is based on data collected in a 1991
survey of a randomly selected, size-stratified sample of manufacturing
establishments. Eighty-four percent of the production managers we contacted
completed the survey, yielding a final sample of 973 plants. The questionnaire
focused on the competitive conditions, technology, and other practices
affecting products manufactured at least partially through the machining
process at the plant. The sample was selected from the sector we define
as machining-intensive durable goods (MDG), which includes 21 industries
at the three-digit level of the standard industrial classification (SIC)
system of the Department of Commerce. Collectively, these industries
account for virtually the entire capital goods sector (excluding computers)
and certain consumer goods. The manufacture of high-tech military hardware
in the form of aircraft, ordnance, navigational equipment, satellites,
and missiles is concentrated in this sector. Overall, durable goods industries
accounted for 82.5% of defense purchases of manufactured goods in 1990
and more than half (51.3%) of all defense purchases of durable goods in
that year came from the MDG sector.
The Extent of Defense Manufacturing
DOD is the final customer (through prime
contracts or subcontracts) for an enormous number of production facilities
in the United States. For the MDG sector alone, we found that 48.8% of
all plants had defense contracts in 1991. We estimate that nearly 40,000
manufacturing plants in this sector throughout the United States were engaged
in defense contracting at that time. This estimate of the extent of the
defense industrial base in the MDG sector in 1991 corresponds closely to
results obtained from the Bureau of the Census's 1988 survey of 10,000
manufacturing plants employing at least 20 workers. Using this government
data source, we computed the percent of plants with defense contracts in
1988 for the same set of industries. Nearly half (49.7%) of all establishments
with 20 or more employees in the MDG sector reported to the Census that
they had defense prime contracts (selling directly to one of the federal
defense agencies) or subcontracts to defense prime contractors. Despite
declines in defense spending in real terms between 1988 and 1991, there
is no statistical evidence of a decline in the share of the overall manufacturing
base in the MDG sector serving DOD during this period.
In U.S. manufacturing, there is a vast,
hidden defense industrial base consisting of a large number of subcontractors
that have no direct dealings with the Pentagon. As Table 1 shows for the
MDG sector, most of the plants (64.1%) with any defense-related sales in
that year did not sell directly to DOD but rather served only as subcontractors
or suppliers to defense prime contractors.
[TABULAR DATA OMITTED]
There is substantial pass-through of defense
spending from major prime contractors to lower tier suppliers. Subcontracts
alone accounted for 41% of all defense-related sales and shipments in the
MDG sector during 1990. From one year to the next, the distinction between
first (or prime) and lower (sub) tier contracting status will vary, because
defense contractors often span tiers, making some products as a prime contract
and others as a subcontract to another defense prime or subcontractor.
Nevertheless, more than half (54%) of the value of shipments from subcontractors
to prime contractors comes from lower tier suppliers; that is, those that
had no prime contracts with a federal defense agency in 1990. Lower tier
subcontractors contribute over one-fifth (22.12%) of all defense-related
sales and nearly two-fifths (38.8%) of all sales from defense contractors
to commercial customers in the MDG sector.
Our sample estimates of the extent of the
pass-through from DOD prime contractors to subcontractors are well within
the range of reports from government sources and from prime contractors
about the extent of dependence on subcontracting. Using data on subcontracts
to small enterprises that were provided by major prime contractors to the
Pentagon, the U.S. Congressional Office of Technology Assessment estimates
that 35 to 37% of all defense purchases in the 1980s went to enterprises
that met one or another criterion as "small". Of course, some subcontracts
go to large companies as well. Our interviews with manufacturing managers
at several major prime contractors (such as General Electric, Pratt &
Whitney, Lockheed, and McDonnell Douglas) indicate that subcontracts account
for 60 to 75% of major prime contractors' costs, depending on the product.
Only a few of the largest defense contractors
are really very dependent on defense sales. Over the 5-year period ending
in 1988, among the 100 largest defense prime contractors, the 67 that are
publicly traded derived only 9% of their total sales from defense prime
contracts, on average. Moreover, only 9 of those 67 firms had 50% or
more of their sales coming from defense contracts during the peak years
of the buildup. Yet, because some of these companies have set up a division
for their defense business, indicating a formal separation between the
reporting chains of command in their other product markets, previous studies
have often assumed there to be little connection between the defense and
commercial sides from the top to the bottom of the enterprise. However,
in matrix organizational structures, the same work groups and organizational
units may report to more than one product or market division and a functional
department as well, such as manufacturing or engineering, that cuts across
product market lines. Only establishment-level data can inform us about
the extent to which activities undertaken to manufacture products for the
military occur alongside those for commercial customers in the same organizational
Drawing on our 1991 survey data for manufacturing
establishments, we measured the extent to which defense procurement is
dependent on a manufacturing base that is substantially isolated from commercial
activities. Our indicator of the degree of defense segregation was the
percent of total 1990 shipments from the plant that was sent directly to
a federal defense agency (including any branch of the U.S. Armed Forces,
the Defense Logistics Agency, depots of the services, and the Department
of Energy) or to a prime contractor of one of those agencies.
Contrary to the conventional wisdom, we
found that in 1990, the typical defense contractor was not especially dependent
on the Pentagon. The median defense share in 1990 was only 15% for plants
with any defense contracts in the MDG sector. The vast majority (80.4%)
of establishments integrated commercial and military production in the
same facility, selling more than half of their 1990 output to commercial
customers. As Fig. 1 shows, only 21.4% of plants with prime contracts had
more than 50% of their sales going to DOD in 1990. For the lower tier subcontractors,
only 18.5% shipped more than 50% of their 1990 output to defense prime
contractors. Moreover, as Fig. 2 shows, less than one-third (32.7%) of
the total shipments of military goods from the MDG sector in 1990 came
from plants that were highly dedicated to defense production (with more
than 80% of their output going to a defense agency or a prime contractor).
The defense industrial base in the MDG
sector includes both large and small companies. Multiplant companies have
the option to place all of their defense orders in one facility and their
commercial work in another. If multiplant corporations adopt such a segregation
strategy, we should find a higher incidence of dedicated facilities among
branch plants doing defense work than among single-plant enterprises. However,
as shown in Fig. 3, there is no difference between these two types of companies
in the proportions of facilities that are highly specialized in making
defense products. We did several statistical tests (at P = 0.05) to examine
the relation between the size of a plant or firm and defense dependence,
as measured by the percent of total shipments from the plant in 1990 that
went directly to a defense agency or a prime contractor. We found no significant
correlation between size, as measured by sales or employment, and the degree
of dependence on defense purchases. We considered both plant and parent
company size in these calculations. Moreover, [[chi].sup.2] tests fail
to show any significant differences in the distribution of plants among
plant or company employment size categories (1 to 49, 50 to 249, and [greater
than or equal to] 250) and the extent of the establishment's dependence
on defense sales when grouped by categories, reflecting 10% intervals (that
is, 0, 1 to 9%, 10 to 19%, 20 to 29%, and so on). We also tested the difference
between group means, comparing the mean size of single-plant enterprises
as a group to that of branch plants of multiunit companies. We found no
statistical differences between the practices of large firms (represented
by branch plants) and those of small firms (represented by single-plant
enterprises) in the sample plants' dependence on defense purchases. For
the plants of multiplant firms and single-plant enterprises alike, fewer
than one in five of the plants that did defense work sold more than 50%
of their output to DOD or a prime contractor.
Although the plants of large firms are
not more defense dependent, on average, than those belonging to small firms,
we did find that facilities dedicated to defense production were somewhat
more common among those branch plants of larger companies that received
prime contracts. As we show in Fig. 4, which looks only at branch plants
of multiplant firms, defense plants that have any prime contracts are significantly
more dependent on sales to DOD, on average, than are branch plants that
only have subcontracting ties to DOD. For example, a larger fraction of
prime contractors (22.3%) than of subcontractors (12.1%) depend on DOD
(or other prime contractors) for 50% or more of their sales. These differences
are statistically significant (P = 0.05) by several tests. Yet facilities
that serve both commercial and military customers are still the norm for
defense plants that are part of multiunit companies.
In short, at the level of the plant, we
find considerable integration between the commercial and military industrial
spheres in the MDG sector. Large multiplant firms that do defense prime
contracting tend to be slightly more dependent on average than are subcontractors.
But overall, we find that defense production in the MDG sector (whether
directly for DOD or indirectly through subcontracts) usually takes place
in facilities in which the majority of shipments go to commercial customers.
Customer Diversity and Competitive Pressures
That defense contractors also serve some
segment of the commercial market may not imply a broad capability to address
a diverse set of customer demands. For example, defense contractors may
conceivably be occupying specialized niches in commercial markets that
are substantially different from those commonly filled by companies without
the shelter of defense contracts. In this section, we address several questions
about customers and competitive conditions in the MDG sector. First, we
ask how many different customers defense contractors ordinarily serve and
how that diversity of customers compares to that of plants operating in
strictly commercial markets. Second, we investigate whether defense contractors
are more dependent on sales to a small number of leading customers than
are establishments with no defense contracts. Third, we consider whether
defense contractors serve only a specialized niche in competitive environments
that are more benign; that is, characterized by fewer rivals and less aggressive
actions by competitors than those experienced by enterprises that are exclusively
engaged in commercial transactions.
In our 1991 survey, we asked the plant
managers to tell us how many different customers purchased products made
by their plants in the previous year (1990). As Table 2 indicates, plants
in this sector serve over 300 customers, on average, and there is no statistical
difference in the number of customers reported by defense contractors as
compared to enterprises serving strictly commercial markets. However, a
substantial number of plants in both groups are niche producers, serving
only a small number of customers. Fifty percent of defense contractors
and their commercial counterparts have 30 or fewer customers. Moreover,
establishments in the MDG sector depend on a small number of key customers,
selling 60% of their total output, on average, to their largest three customers
in 1990. The point is that on the whole, defense contractors have as diverse
a customer base and are as dependent on a few key customers as nondefense
Turning to the specific features of the
product markets for machining output from these plants, we learn that custom-built
products are the norm for this sector. The typical plant produces nearly
half (46.9%) of its machining output in small lots of only one to nine
items. Moreover, we find no evidence that defense contractors are more
specialized in making highly customized machining products than are establishments
making products solely for commercial customers. In fact, we find the opposite:
Strictly commercial plants produce significantly more of their output in
small lots (P = 0.0001); and compared with defense contractors (43.1%),
a greater share of plants with no defense contracts (56.2%) specialize
in customized products, making 50% or more of their total machining output
in batch sizes of fewer than 10 items.
In assessing the competitive environment,
we considered several indicators, including the number of competitors and
the extent to which rivals are particularly aggressive in competing for
the same customers in terms of price, quality, or service. On average,
we find that defense contractors report having a significantly larger number
of competitors than do enterprises that have no defense contracts (P =
0.0008). But, as is shown in Table 3, a substantial share of both types
of plants operate mainly in markets with few competitors. Fifty percent
of defense contractors report six or fewer competitors; the median for
nondefense enterprises in this sector is five or fewer competitors. In
the MDG sector, the competitive environment for half of the enterprises
in strictly commercial product markets consists of only a few rivals rather
than the many sellers assumed to prevail in commercial markets.
[TABULAR DATA OMITTED]
In sum, many of the features thought to
be peculiar to the defense contracting relation also apply to a substantial
share of the strictly commercial producers in this sector: a high dependence
on a small number of customers, an evident willingness to custombuild products;
and very few competitors.
In the 1991 survey, we asked about four
different actions of competitors over the preceding 2 years. The most common
competitive pressure came from price reductions offered by rivals to important
customers. Nearly three-fifths (59.3%) of plant managers in the MDG sector
reported that competitors had undercut their prices sometime during the
previous 2 years. Offering new services or assistance to customers is another
common way in which companies attempt to win business away from rivals
in this sector. Less common are reports of predatory actions by rivals
to discourage distributors or customers. And even though product quality
has been touted in the business press as an important competitive pressure,
few plant managers reported that their rivals were outcompeting them in
Overall, we find no indication from these
data that defense contractors are especially insulated or sheltered from
competitive pressures experienced by companies operating in strictly commercial
product markets. Indeed, in terms of two of the four indicators measuring
the severity of competitive pressures, defense contractors experienced
a significantly higher incidence of aggressive actions from competitors
than did nondefense enterprises. Price undercutting behavior (P = 0.0001)
and targeted attacks by competitors to undermine their ties to customers
and distributors (P = 0.02) were more frequently experienced by defense
contractors than by other manufacturers. Heightened rivalry among contractors
for declining Pentagon orders may be part of the explanation for these
differences, as might procurement reforms undertaken after the 1984 Competitiveness
in Contracting Act that were designed to deliberately introduce greater
price competition in defense contracting.
All of the establishments surveyed in the
MDG sector make products with precision machine-tool technologies. Although
we do not have information on all types of subcontracting practices at
these plants, our survey did ask about subcontracting of operations from
the machining production process at the plant. Our maintained hypotheses
were that cost-based pricing rules in defense contracting should contribute
to hoarding of direct production labor, and that defense contractors should
be less likely to engage in production subcontracting and to spend less
on subcontracts when they did contract out, as company with the strictly
Table 4 compares machining subcontracting
practices in 1989-90 between defense contractors and plants with no contract
ties to DOD. We find that, on average, defense contractors are actually
significantly more likely than nondefense enterprises to rely on machining
subcontractors (P = 0.0001). For this key production process, 66% of defense
contractors subcontract out at least some part of that work to other firms,
as compared with only 51% of plants that do no defense contracting.
[TABULAR DATA OMITTED]
Among those that do contract out, we find
no statistical difference between defense contractors and their strictly
commercial counterparts in the MDG sector in the amount of subcontracting
they do, as indicated by the amount of purchases from machining subcontractors
in 1990 as a share of the total value of shipments from the plant. Similarly,
we find no difference between defense contractors and nondefense producers
in this sector in the average number of 2subcontractors they employ.
With respect to the machining process,
at least, we find no support for the presumption that defense contractors
are reluctant to engage in subcontracting as compared with their strictly
commercial counterparts. It is therefore unlikely that government accounting
and pricing procedures deter defense contractors from subcontracting.
Technology Investment Practices
Hoarding of direct labor and the failure
to make investments to improve productivity have long been identified as
a possible source of high costs among defense contractors. Indeed, as early
as 1976, a major Pentagon review of procurement practices concluded that
defense contractors used only 42% as much capital equipment and facilities
per dollar of sales as did durable goods manufacturers overall. In
1980, the House Armed Services Committee drew similar conclusions about
the lack of investment in new manufacturing technologies by defense contractors.
During the 1980s, information technology
applications in which computer software and microelectronic control devices
are used to direct and monitor such ordinary production operations as machining,
welding, testing, and inspecting were first introduced in the United States
and elsewhere. These technologies have been heralded as providing cost,
performance, and flexibility advantages for a wide range of uses. Cross-national
comparisons of the adoption and use of certain applications, particularly
for the machining process in the form of numerically controlled (NC) and
computerized numerically controlled (CNC) machine tools flexible manufacturing
systems (FMS), have come to be taken as indicators of the relative strengths
of the manufacturing sectors of industrial economies.
Our survey results confirm a statistically
significant difference (P = 0.0001) in the adoption rates of these types
of advanced manufacturing technology related to defense contracting. But
the differences we find, as shown in Fig. 5, are not what we would expect
if defense contracting practices were a deterrent to investment in productivity-enhancing
technologies. Sixty-six percent of plants with defense contracts have programmable
machine tools (CNC, NC, or FMS), compared with 50% of plants that have
no contract ties to DOD or any of its prime contractors. Moreover, defense
contractors that adopt this technology employ a much higher fraction of
programmable machines in their total machine toot stock than do establishments
engaged in the same manufacturing process but having no defense contracts.
For each of the five common uses of computers
in manufacturing shown in Fig. 5, defense contractors have higher rates
of use. In addition to programmable machine tools, these applications include
computer-aided design (CAD), computer-aided manufacturing process control
systems (CAM - used to plan and monitor inventory, work-in-process, and
materials flow), computer-aided materials planning, and the use of programmable
automation in other production processes. For every one of these technologies,
we find significantly higher adoption rates (P = 0.0001) among defense
contractors than among plants serving exclusively commercial markets.
Although it is difficult to single out
a particular cause for these differences, we believe that government policy
initiatives and programs directed at the defense industrial base are at
least partly responsible for the large technological gap we find between
defense contractors and other U.S. manufacturing establishments in the
MDG sector. From 1982 to 1992, the Industrial Modernization and Incentives
Program of DOD provided technical assistance to contractors in assessing
the applicability of advanced manufacturing technologies to defense contractors'
operations. Through its manufacturing technologies (Mantech) program, DOD
has also supported the development of advanced technologies and improvements
in process technologies among defense suppliers. The Pentagon spent between
$150 million and $200 million annually throughout the 1980s on these programs,
which exceeded spending by all state governments on technical assistance
programs aimed at manufacturing firms during the same period. Hundreds
of defense contractors were directly assisted by these programs. DOD also
sponsored annual conferences and workshops on manufacturing practices to
highlight the lessons learned from the experiences of the early adopters
of these advanced manufacturing technologies, providing an opportunity
for representatives from the larger defense industrial community to become
acquainted with the difficulties in implementing technical changes and
the strategies employed by lead users to solve them. We believe that such
forums promoted the dissemination of information about the implementation
process that was not as readily available to manufacturing firms outside
the defense contracting system. Our research also indicates that major
prime contractors provided technical assistance and support to their suppliers
that were less commonly available to companies with no contractual relation
to DOD or its prime contractors.
Access to the technical assistance and
supplier development activities of prime contractors and DOD can be construed
as providing a competitive advantage to defense contractors that is not
widely available in other supplier production chains. Research on supplier
relations in the auto industry, for example, suggests that customer-supplier
relations are not characterized by the type of information-sharing and
technical assistance that we find to be so common among defense contractors.
Other research also indicates that institutional mechanisms that foster
information sharing and interorganizational learning can accelerate the
diffusion of new technologies. Thus, the higher rates of adoption of
advanced manufacturing technologies we find among defense contractors are
at least partly attributable to the greater opportunities for interorganizational
learning fostered by such government-sponsored activities.
Defense spending reaches a broad segment
of manufacturing in the MDO sector, affecting nearly one-half of all establishments.
Contrary to conventional wisdom, commercial-military integration is not
only feasible but is largely the normal practice at the end of the Cold
War. The vast majority of defense contractors in the MDG sector manufacture
military products in the same plants with the same workers and equipment
employed in producing items for commercial customers. In fact, commercial
customers dominate the sales of most defense contractors in this sector.
Moreover, defense plants, on average, face as much competitive pressure
as do those that produce only for commercial markets. Also, defense contractors
use more modern and flexible manufacturing technologies at a higher rate
than their strictly commercial counterparts do.
We conclude that the legacy of the 1980s
defense buildup has been the generation of an industrial complex poised
to exploit certain quite common kinds of commercial markets - those involving
customized durable goods - in a post - Cold War era of flexible manufacturing.
In the MDG sector, DOD has provided a more supportive environment for long-term
investments and the transfer of technology than occurs for firms engaged
in strictly commercial customer-supplier relations. Moreover, we find little
evidence to support the widely held contention that government contracting
procedures have forced a divide in the organization of military and commercial
production for the vast majority of contractors. The policy challenge will
be to find new ways to promote such supportive interfirm exchanges outside
the defense contracting network.
The integration of defense and commercial
manufacturing activities may not be viewed as uniformly beneficial to society
or even to the economy as a whole. For instance, degree of integration
we find at the end of the Cold War may reflect as much on the weaknesses
of producers in commercial markets as on the capabilities of defense contractors
or the influence of the Pentagon as an important buyer for this sector
during the 1980s. We have focused here on the narrower questions involved
in identifying the extent to which integrated dual-use capabilities exist
among defense contractors and the degree of overlap between the competitive
and technical environments of the defense and commercial industrial spheres.
Further research is needed to inform debates
concerning the need for post-Cold War industrial technology policies. Policy
discussions about the feasibility of the integration of military and commercial
production and the barriers to defense conversion and diversification would
benefit from more realistic assessments of the nature of the competitive
environment that commercial enterprises face and the kinds of interdependencies
among firms that are important to industry performance. Our study is the
first to do so for a large cross-section of U.S. industry in a key sector.
We think that other studies should be pursued, particularly in such processes
as microelectronics and telecommunications. In our view, too much attention
has been given to a few high-profile cases and too little attention to
analyses of the broader industrial base. If our findings for the MDG sector
hold true for manufacturing as a whole, we see few technical or organizational
barriers to converting most defense plants to further serve commercial
REFERENCES AND NOTES
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Rev. 124, 677 (1985); D. K. Henry and R. P. Oliver, Mon. Labor Rev. 1987,
3 (August 1987).
[2.] R. A. Bitzinger, Adjusting to the
Drawdown: The Transition in the Defense Industry (Defense Budget Project,
Washington, DC, 1993).
[3.] J. A. Alic, L. M. Branscomb, H. Brooks,
A. B. Carter, G. L. Epstein, Beyond Spinoff: Military and Commercial Technologies
in a Changing World (Harvard Business School Press, Boston, MA, 1992).
[4.] D. Blair, Ann. Am. Acad. Polit. Soc.
Sci. 517, 146 (1991).
[5.] J. Gansler, Affording Defense (MIT
Press, Cambridge, MA, 1989).
[6.] A. Markusen and J. Yudken, Dismantling
the Cold War Economy (Basic Books, New York, 1992).
[7.] S. Melman, The Permanent War Economy
(Simon and Schuster, New York, 1974).
[8.] Deterrence in Decay: The Future of
the U.S. Defense Industrial Base (Defense Industrial Base Project, Center
for Strategic and International Studies, Washington, DC, 1989); Integrating
Commercial and Military Technologies for National Strength: An Agenda for
Change (Center for Strategic and International Studies, Washington, DC,
1991); T. Lundquist, Harv. Bus. Rev. 70, 74 (1992).
[9.] M. Peck and F. M. Scherer, The Weapons
Acquisition Process: An Economic Analysis (Harvard Univ. Graduate School
of Business Administration, Boston, MA, 1962).
[10.] J. S. Demski and R. P. Magee, Account.
Rev. 67, 732 (1992).
[11.] R. J. Samuels, "Rich Nation Strong
Army": National Security and Ideology in the Technological Transformation
of Japan (Cornell Univ. Press, Ithaca, NY, 1994).
[12.] W. P. Rogerson, Account. Rev. 67,
[13.] In particular, the increased use
of fixed-price contracts during the 1980s is thought to have discouraged
long-term investments in productivity-enhancing technologies by defense
contractors [K. W. Tyson, J. R. Nelson, N. I. Om, P. R. Palmer, Acquiring
Major Systems: Cost and Schedule Trends and Acquisition Initiative Effectiveness
(Institute for Defense Analysis, Alexandria, VA, 1989)].
[14.] Machining involves the use of precision
tools to cut and shape metal and includes grinding, drilling, milling,
planing, boring, and turning operations. It is a process found in many
manufacturing industries. Based on the industry-occupational matrix for
1985 constructed by the U.S. Bureau of Labor Statistics, we identified
21 industries specializing in this production process. Each industry accounted
for at least 1% of all employment in machining occupations in manufacturing,
and employment in machining occupations constituted at least 10% of all
production employment in the industry. A size-stratified random sample
of plants from these industries was selected and surveyed in 1987 and 1991.
The industries are: nonferrous foundries (SIC 336); cutlery, hand tools,
and hardware (SIC 342); heating equipment and plumbing fixtures (SIC 343);
screw machine products (SIC 345); metal forgings and stampings (SIC 346);
ordnance and accessories not elsewhere classified (SIC 348); miscellaneous
fabricated metal products (SIC 349); engines and turbines (SIC 351); farm
and garden machinery and equipment (SIC 352); construction and related
machinery (SIC 353); metalworking machinery and equipment (SIC 354); special
industrial machinery, excluding metalworking (SIC 355); general industrial
machinery and equipment (SIC 356); miscellaneous machinery, excluding electrical
(SIC 359); electrical industrial apparatus (SIC 362); motor vehicles and
equipment (SIC 371); aircraft and parts (SIC 372); guided missiles and
space vehicles (SIC 376); engineering and scientific instruments (SIC 381);
measuring and controlling instruments (SIC 382); and jewelry, silverware,
and plateware (SIC 391).
[15.] These figures are based on the estimates
of direct and indirect effects of defense spending in 1990 as reported
in Industrial Output Effects of Planned Defense Spending, 1990-1994 (Office
of Policy Analysis, Economics and Statistics Administration, U.S. Department
of Commerce, Washington, DC, February 1991).
[16.] Current Industrial Reports: Manufacturing
Technology 1988, SMT(88)-1 (Bureau of the Census, U.S. Department of Commerce,
Washington, DC, 1989).
[17.] This estimate applies to all DOD
purchases, including those for services as well as manufactured goods.
For certain defense contracts, an enterprise is considered to be "small"
if it employs fewer than 500 workers. In other contracts, the definition
of "small" includes companies that employ up to 1000 people [After the
Cold War; Living with Lower Defense Spending, OTA-ITE-524 (Office of Technology
Assessment, U.S. Congress, Washington, DC, 1992)).
[18.] Profit '76: Summary Report (Profit
Study Group, Office of the Assistant Secretary of Defense installations
and Logistics, U.S. Department of Defense, 1976).
[19.] The Ailing Defense Industrial Base:
Unready for Crisis, Report of the Defense Industrial Base Panel, H.R. Doc.
No. 29 (Committee on Armed Services, House of Representatives, U.S. Congress,
[20.] R. U. Ayres and S. M. Miller, Robotics:
Applications and Social Implications (Ballinger, Cambridge, MA, 1983);
L. J. Hirschhorn, Beyond Mechanization: Work and Technology in a Postindustrial
Age (MIT Press, Cambridge, MA, 1984); R. Kaplinsky, Automation: The Technology
and Society (Longman, Harlow, UK, 1984); M. J. Piore and C. F. Sabel, The
Second Industrial Divide: Possibilities for Prosperity (Basic Books, New
[21.] C. Edquist and S. Jacobsson, Flexible
Automation: The Global Diffusion of New Technology in the Engineering Industry
(Basil Blackwell, Oxford, UK, 1988); M. R. Kelley and H. Brooks, "Diffusion
of NC and CNC Machine Tool Technologies in Large and Small Firms," in Computer-Integrated-Manufacturing,
Volume III: Models, Case Studies, and Forecasts of Diffusion, R. U. Ayres,
W. Haywood, I. Tchijov, Eds. (Chapman and Hall, London, 1992); Making Things
Better: Competing in Manufacturing, Report No. OTA-ITE-443 (Office of Technology
Assessment, U.S. Congress, Washington, DC, 1990)
[22.] P. Shapira, Modernizing Manufacturing:
New Policies to Build Industrial Extension Services (Economic Policy Institute,
Washington, DC, 1990).
[23.] S. Helper, Sloan Manage. Rev. 32,
[24.] M. R. Kelley and A. Arora, Service
Provider or Institution Builder? An Assessment of the Role of Industrial
Modernization Programs in U.S. Technology Policy, MIT IPC Working Paper
95-004WP, Industrial Performance Center, Massachusetts Institute of Technology,
Cambridge, MA; N. R. Rosenberg, Explor. Econ. Hist., 3, 3 (1972); E. von
The Sources of Innovation (Oxford Univ.
Press, New York, 1988); T. A. Watkins, Res. Policy 20, 87 (1991).
[25.] We thank H. Brooks, E. Gholz, B.
Harrison, R. Lester, R. J. Samuels, F. M. Scherer, and E. Skolnikoff for
their advice and comments. Supported by grants from NSF (grants SES-8911141
and SES-9122155) and the Office of Technology Assessment of the U.S. Congress.
M. R. Kelley is with the Department of
Political Science and the Industrial Performance Center, Massachusetts
Institute of Technology, Cambridge, MA 02139, USA (on leave from Carneige
Mellon University). T. A. Watkins is with the Department of Economics,
College of Business and Economics, Lehigh University, Bethlehem, PA 18015,
illustration table graph