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The defense industrial base is that part of the overall U.S. production capability that represents the industry side of the so-called "military/industrial complex." It is as much an element of our military deterrence as our array of weapon systems. The base must be able to provide high-quality weapon systems, and equipment support, at minimum cost. It must be able to accelerate production, on demand, in both peacetime and wartime.

The size of the base is heavily dependent upon the Department of Defense (DOD) budget. Historically, following every military crisis, the United States has significantly reduced its defense budget in order to stimulate other areas of the economy. Although DOD has come to expect and plan for this fact of life, the post-Vietnam period has produced some unique trends that are causing considerable concern in government and industry circles:

The level of defense procurement outlays (that is, the share of the defense budget spent to buy equipment for the military forces) is at its lowest point, in constant dollars, since the early 1950s (see Exhibit 1). One cause of this is the increasing share of the defense budget required to pay for the "All-Volunteer Service."

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Like many other industries, defense contractors have gone multinational, with annual foreign military sales increasing from $1.6 billion in 1970 to more than $10 billion in 1974 and 1975. As a group, the major defense contractors now rely heavily on these foreign military sales. This volume represents about 40% of the total U.S. production of defense related items.

110

Harvard Business Review

May-June 1977

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The United States is no longer the clearly dominant military force in the international community. While we were absorbed with Vietnam, the Soviet Union was systematically closing the technological gap in weapon system sophistication, while at the same time establishing a quantitative edge in standing forces and production rates of most equipment.

These trends have contributed to a series of problems and strains in the defense industrial baseexcess production capacity (particularly at the large aerospace prime contractors); deteriorating contractual relationships (for example, in the shipbuilding industry); insufficient efforts to improve corporate productivity; decreasing numbers of defense-oriented subcontractors and suppliers; and a growing dependency on foreign sources of raw materials and foreign production of critical components. In addition, the limited data available indicate serious problems in the base's capability to increase production rates significantly when called upon.

For example, after the 1973 Mid-East war, when Congress approved a rapid build-up of combat tanks, the prime contractor (Chrysler, operating a government-owned plant) was ready, but the sole company supplying turret and hull castings had all the commercial business it could handle. This supplier's response was "no, thank you" to DOD's request for greatly increased output.

How did it happen that only one company was supplying a necessary part to a prime contractor? The cause was the low level of procurement expenditures-one supplier was all that could survive. Unfortunately, "sole-source contractors," as such companies are called, are becoming far more numer ous as the level of hardware complexity rises and the annually procured quantities shrink.

Critical problems such as these require immediate corrective action on the part of industry, DOD, and Congress. The objectives of such action should be:

1

Improved short- and long-term economic efficiency.

2

Improved responsiveness to demands for production

increases.

3

The means to continuously develop and incorporate new, more advanced engineering and manufacturing technologies.

Defense decision makers need to be able to determine the impact of alternative acquisition strategies on the industrial base. They need to find ways to break down the "barriers to exit" which exist at the large prime contractor level, and the "barriers to entry" which now exist at the subcontractor and supplier levels, thus encouraging real competition in bidding for defense contracts. It is my opinion that true competition does not exist at either the large, prime contractor level or at the smaller, critical-component supplier level.

One major obstacle is institutional in nature. Although DOD is virtually the sole buyer at the prime contractor level, and its prime contractors are oligopolies extensively using government plants, equipment, and money, DOD has essentially no policies or organizations dedicated to planning for the most effective use of its industrial resources. A good case can be made for the need to create such policies and organizations, though, if that is done, full public accountability should also be required.

DOD is looking to the executives of industry to take the lead in correcting many of the current prob