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Study finds defense contractors adjust readily to changes

A study co-authored by a visiting MIT scholar has found that, contrary to conventional wisdom, makers of military equipment can adjust quite readily to the production of commercial goods. In fact, because of their greater use of productivity-enhancing technology, such firms have an advantage.

As the Cold War ended, the manufacturing operations involved in making military equipment and commercial goods were "believed to intersect hardly at all," wrote Maryellen R. Kelley, the MIT visitor, and Todd A. Watkins.

However, their analyses of 1991 data from a large sample of durable goods companies show that there are only a few "technical and competitive conditions separating the defense and commercial industrial spheres."

The normal practice among the majority of defense contractors in this sector is now "commercial-military integration of production," they wrote in a paper that appeared in the April 28 issue of Science.

"Moreover, we find little difference between defense and commercial producers in the competitive conditions they face or in the diversity of their customers," they said.

Dr. Kelley is a visiting associate professor in the MIT Department of Political Science and the Industrial Performance Center on leave from Carnegie Mellon University. She holds the PhD (1984) from the Sloan School of Management, a masters degree in city and regional planning from Harvard and a BA from Brandeis University. Dr. Watkins is with the Department of Business Economics at Lehigh University. Their study is titled, "In From the Cold: Prospects for Conversion of the Defense Industrial Base."

Many have argued "that defense contractors have little experience with commercial customers and are unfit for the rigors of competitive markets," the authors wrote. "As a consequence, conversion of defense manufacturing facilities to commercial uses is expected to be costly and have little chance for success."

However, these widely held suppositions about the singularity of defense production and its isolation from commercial practice have not been subject to rigorous empirical tests, Dr. Kelley and Dr. Watkins said.

"With data from our 1991 survey of US manufacturing firms from 21 durable goods industries, we demonstrate that structural and behavioral barriers thought to divide defense contracting from commercial manufacturing are actually quite rare," they said. "The defense industrial base is far-reaching and substantially `dual-use,' meeting both commercial customers' requirements and military specifications in the same facilities-indeed, using the same equipment and workforce."

The study found only a few of the largest defense contractors are very dependent on defense sales. Over the five-year period that ended in 1988, among the 100 largest defense prime contractors, the 67 that are publicly traded derived only nine percent of their total sales from defense prime contracts, on average. Moreover, only nine of those 67 firms had 50 percent or more of their sales coming from defense contracts during the peak years of the military buildup.

By 1990, the typical defense contractor was not especially dependent on the Pentagon, the authors wrote. "The vast majority [80.4 percent] of establishments integrate commercial and military production in the same facility, selling more than half of their 1990 output to commercial customers."

The researchers concluded that commercial-military integration is not only feasible, but is largely the normal practice now.

"The vast majority of defense contractors. 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.

"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."

Finally, the authors noted that 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, the 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."

A version of this article appeared in MIT Tech Talk on March 22, 1995.

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